Most investors who try to time investment in stock markets often come a cropper. That does not mean the idea of timing is flawed. While trying to predict the best time to buy and sell stocks is a huge bummer for many, what if you could do away with the trouble of timing the market and reap good returns too?

Mutual funds not only offer a safer and indirect way to buy into stocks, they also offer a range of investment strategies to beat the market, if applied in a suitable way. The commonest and simplest strategy of investing in mutual funds is investing a lump sum. But there are other tried and tested ways of investing in mutual funds that you can use to ride out market volatility and optimize the return. Let’s have a look at these strategies. You can choose any strategy that matches your risk appetite and your financial goals.

SIP Your Way

After lump sum investment, SIP or systematic investment plan is another simple and a common investing strategy. One of the great advantages of SIP is that it not only helps disciplined investing, you can also cushion the pitfalls of stock market investment and still enjoy high returns on your investment. SIP is like climbing a high-rise building not in one go, but step by step. Under SIP, you can invest a fixed sum of money in a particular mutual fund scheme at regular intervals, generally monthly or quarterly.

Many fund houses allow SIP with as low amount as Rs 1000 a month. Apart from disciplined investing, another great advantage of SIP is that it averages out your cost of investment and hence reduces your risk. Let’s understand it with an SIP of six months. In the first month, if you invest Rs 1,000 in a fund NAV of Rs 20, it means you have bought 50 units of the fund. Again, in the second month you invest Rs 1,000 but the NAV of the fund dips to Rs 18. This means you buy 55.5 units of the fund in the second month. In the third month, again you invest Rs 1000 while the NAV climbs to Rs 19. This means you buy 52.6 units. In the fourth month, again the NAV goes down to 16 and you get the opportunity to buy 62.5 units, more than the previous month. In the fifth month, the NAV further goes down to 15, but you bag a higher number of units i.e. 66.6. In the sixth month, the NAV goes up to 19, which means you pocket 52.6 units again.

Thus, at the end of six months your total investment comes out to Rs 6,000 and you manage to accumulate 50+55.5+52.6+62.5+66.6+52.6 = 339.8 units. The total value of your investment after six months amounts to Rs 6456 (19*339.8). If you were to put in a lump sum of Rs 6,000 in the same fund, you would have owned only 315 units (6000/19) as against 339 units through SIP. This is the magic of rupee cost averaging that reduces risk and generates superior returns (See How Rupee Cost Averaging Works). SIP is a very good investment option for small investors who cannot contribute a large sum for their life goals. 

And not to forget the power of compounding that comes along with regular fixed investment over a period of time. SIP gives you the edge of compounding by reinvesting the money you earn from your investments to earn even more. The earlier you start, the longer your investment gets time to compound and add to your corpus. Let’s take an example for a SIP of Rs 1,000 invested per month @8% expected return till the age of 60. (See The Power of Compounding).

“By this method [SIP], one neglects the market noise with respect to market valuation and invests regularly at different market levels, both at low valuations and high valuations, thus averaging his/her buying cost. This way your long term annualized yield on your investments remains less prone to investment shocks i.e. when markets fall too much too quickly or when they rise too fast before you notice,” maintains Rakesh Goyal, Senior Vice President, Bonanza Portfolio.

However, the greatest disadvantage of SIP is that while it works very effectively in volatile stock markets it fails to generate returns in case markets are moving in one direction such as constant rising or falling, simply because the rupee-cost average doesn’t work in a unidirectional market.

Systematic Transfer Plan (STP)

Also called Systematic Switch Plan, this strategy is similar to SIP but with a small difference. While you invest a fixed amount regularly in SIP, under STP you give standing instruction to the mutual fund company to periodically transfer a fixed amount or switch (redeem) fixed units from one fund scheme and invest in another on a daily, weekly, monthly or quarterly basis. The fund will deduct the number of units equal to the amount you have specified from the scheme you intend to transfer money from. This transferred amount is used to buy the units of the fund you wish to transfer money into.

Fund houses give a choice between either switching a fixed sum or only the capital appreciation to be transferred at a pre-determined time. So don’t invest without checking the option. 

 This strategy is best suited for investors who don’t want to take on much risk of equity markets. So while remaining invested in an equity fund they can opt for periodic transfer of a fixed amount in liquid or debt funds, thus reducing the downside risk.

STP is basically for those investors who want to get the best of both worlds — capital appreciation by investing in equity funds while, at the same time, protect their investment by putting some money in a debt fund and earn a stable return.  

As Goyal of Bonanza Portfolio says, “To get the best of this scheme, you should invest lump sum in liquid funds and transfer them regularly through STP into equity or other schemes. This is better than SIP as liquid funds would fetch you higher than your savings account which is used in SIPs.”

STP is a good way of gaining a gradual exposure into equities or of gradually reducing exposure over a period of time. Like SIP, STP too has benefits of rupee cost averaging and it averages out the cost by buying more fund units at a lower NAV and vice versa.

Another advantage is that if you’re not an aggressive investor, you can choose STP over SIP as it balances your portfolio by investing in both debt as well as equity. 

Vivek Gupta, CMT, Director, CapitalVia Global Research says, “STP has advantages as it works both as an SIP as well as an SWP. One can invest in a debt fund and from there he/she can start an STP to an equity fund, so it works like an SIP. STP can also work like SWP, because with some funds one can do transfer from equity funds to debt funds, so when markets look risky to an individual, he/she can start an STP from equity to debt funds, which will act like SWP.”

STP from a debt fund into an equity fund works best when markets are volatile and are going down or have bottomed out.  In this case, you can gain good returns from equity funds when markets start moving up. At the same time, you keep a part of your investment secure by investing in a debt fund. STP from a debt fund into an equity fund is not advisable when markets are moving up. However, you can go for STP from an equity fund to a debt fund when the markets have peaked, since you can not only redeem from equity fund but minimise risks by transferring equity capital appreciation into a debt fund. 

Systematic Withdrawal Plan (SWP)

Contrary to SIP, under SWP you withdraw a fixed amount or fixed units from a fund at pre-determined period. You can either reinvest the amount in any instrument or meet your expenses. SWP is suited for those who want to receive regular income at regular intervals. For instance, if you need a regular income through SWP you can withdraw either a fixed sum monthly, quarterly, half-yearly or annually, or the capital appreciation of your investment in the fund.

However, it’s better to read the rules and regulations of the fund house regarding SWP as many fund houses have stipulated a minimum account balance in order to start the SWP facility. 

SWP strategy is particularly beneficial to retired people who need a regular source of income. SWP not only provides a regular income and liquidity, it protects you from market volatility too as regular withdrawal averages out return value. SWP is also a tax-efficient way of receiving regular income as it reduces tax obligation by staggering income across multiple phases instead of redeeming all the units at once. 

However, this strategy can be a drawback if you choose to withdraw a fixed sum as the fund company will withdraw from your capital investment if there is less gains. Thus, relying on this option for your income needs can be painful as the regular withdrawal may vary as per the market performance.

“To get the best of this scheme, one needs to invest in fixed-income instruments which have stable returns such as liquid funds or ultra short term schemes. This is because if your investment earns lesser than your withdrawal, it would lead to capital erosion in longer term,” argues Goyal of Bonanza Portfolio.

Dividend Transfer Plan (DTP)

If you want to invest in equities and at the same time maintain a large part of your investments in fixed income schemes, then DTP is the strategy you can look up to. Simply speaking, under DTP you invest the dividends received from one eligible fund scheme (source scheme) into another eligible scheme (target scheme).

DTP is suitable more to risk averse investors who want a stable income along with capital protection. You can either transfer dividends declared by an equity scheme to a debt fund or from a debt fund to an equity scheme, thus ensuring that your profits are protected. However, a limitation of DTP is that the frequency of dividend transfer is dependent on the dividends which is neither guaranteed nor is assured.

DTP facility is given only under the dividend plan/option of the source scheme(s).  Further, many fund houses require you to submit request for enrolment for DTP at least 10 days prior to the record date for the dividend. If not, the enrolment would be considered valid from the immediately succeeding record date of the dividend. 

Another fact you need to keep in mind is that the Dividend Distribution Tax (DDT) on debt funds is now 28.32% (effective October 1, 2014). So from tax point of view, DTP from debt to equity fund may not be a feasible strategy now. Since there is no DDT on equity schemes, DTP from equity to debt could be more tax-efficient.

“SWP and DTP from equity funds could be helpful to book profit on regular basis. SWP is also ideal for those looking for regular income flow from their investments. If markets are bearish, equity funds’ dividend can be transferred to liquid funds and can be reinvested at lower market levels,” argues Srikanth Meenakshi, cofounder and COO, FundsIndia.com.

Value Averaging Investment Plan (VIP)

It’s much similar to SIP. The only difference is that while under SIP you invest a fixed amount of money, under VIP the amount is flexible. But how much is invested in a month depends on the performance of the fund in the previous month. The crucial components of VIP are maximum value, minimum value and an expected return on your investment. Let’s see how they work.

If the fund performs better than the expected return in the previous month, you would be investing a proportionally lower amount in the subsequent month. On the contrary, if the performance of the fund is worse than expected in the month gone, you will have to put in a proportionally higher amount in the subsequent month. In either case however, the invested amount cannot be lower than the minimum value or higher than the maximum value specified. 

For instance, suppose you plan to invest in a fund with a target value of Rs 5,000 each month which means you plan to grow your monthly corpus by Rs 5,000. In the first month you invest Rs 5,000, but next month you realize that your portfolio value has increased to Rs 5,200. In this case, you don’t invest Rs 5,000 again. Instead, what you have to invest is Rs 4,800 (Rs 10,000–5,200) to ensure your corpus value remains Rs 10,000. 

Again, suppose in the subsequent month your corpus value dips to Rs 9,600. In that case what you need to invest is Rs 5,400 (Rs 15,000–9,600) to maintain the target amount of Rs 15,000.

The beauty of VIP lies in the concept that you invest more when the markets are low and invest less when the markets are high. So, instead of investing a fixed sum you invest as per market conditions and maximize gains through rupee cost averaging. 

VIPs have the potential of generating a higher return than SIPs (SeeComparison Between VIP & SIP). However, like SIP, if the markets are moving in one direction VIP can end up giving less return than SIPs.

“Historical back testing analysis of VIP & SIP reveals that the return on the VIP is better than SIP investments. However, very few investors prefer it due to complexities like variable monthly investments and limited investment options,” maintains Meenakshi of FundsIndia.com.

As you can see VIP gives higher return than SIP, with a lower average cost per unit.

There’s another variant of VIP called Value-averaging transfer plan (VTP) combining both STP and VIP concepts. In VTP, the amount to be invested in a fund is not debited from your bank account. Rather, it is transferred from a liquid/debt fund to the equity fund or vice versa. 

Before you lay your hands on any of these strategies, do not sign on the dotted lines before reading through the lengthy terms and conditions and the fine print of each investment strategy that the fund house gives you in writing.

Also, note that while SIP, STP, DTP and SWP strategies are offered by almost all fund houses, VIP is offered by a select few.