For people who choose to invest in a mutual fund, the two most common routes are putting a substantial chunk of money, or lumpsum, or the systematic investment plan (SIP).
But did you know there are a few other lesser known ways of investing in a mutual fund such as systematic transfer plan (STP), systematic withdrawal plan (SWP), trigger strategy and value averaging investment plan (VIP) that have the same, if not less, potential to generate returns on your investments?
Let’s look at how these various strategies work, how they can add value to your investments and how to make the most of each investment strategy.
Systematic Transfer Plan
STP is similar to an SIP. However, there is a fine line that divides the two. As the name suggests, STP is an option wherein funds from one scheme is transferred to another scheme in a systematic manner.
This strategy is ideal for an investor who holds cash but doesn’t want to put the entire money in an equity fund in one go.
Here, an investor can choose to invest the entire amount in a liquid scheme of the same fund house and opt for an STP of a certain amount from liquid (source scheme) to the equity scheme (target scheme) on weekly/ monthly or even daily basis, depending upon the investor and STP options provided by the company.
Further the options provided under STP, namely daily, weekly and monthly, vary from one company to the other. So be sure to check the available options from your advisor or the company before investing.
STP works in a similar way to an SIP as the money is systematically invested in the equity scheme. The advantage is that apart from averaging in the equity fund through STP, the amount in the liquid fund also generates return which adds to the capital.
Doing The Math
Let us do some math to understand this with an illustration. Mr A has Rs 1,20,000 as investible amount but he is neither sure about the equity market direction nor does he want his money to stay idle in his bank account. He explores the option of STP and decides to invest in equities through it.
Mr B, on the other hand, also has Rs1,20,000 but not knowing about STP he invests directly in the same equity fund. Let’s see the difference in returns that both A and B get at the end of one year. In case of Mr B, he invests Rs 1,20,000 in an equity fund in lump sum, whose NAV is Rs 9.90, and gets 12121.21 units of the fund.
However, at the end of one year the NAV of the fund goes down to 9.80 and so does the final fund value that shrinks to Rs 1,18,787.9 — a net loss of Rs 1212.
However, Mr A invests Rs 1,20,000 in a liquid fund at NAV of Rs10 and starts a monthly STP of Rs 10,000 in an equity fund. Let’s see the returns he gets after one year (See Understanding...).
As you can see, at the end of one year, the final fund value of equity funds would come to be Rs 1,18,919.66 (12134.66×9.80) while the final value of liquid fund would be Rs 5480.86. When added, the total fund value comes to be Rs 1,24,400.53, a net gain of Rs 4400.53 or 3.67%.
SWP, as the name suggests, means withdrawing the built up corpus in a systematic manner. This option is an excellent tool for investors who have built up sizeable corpus through their investments and do not want to withdraw the entire amount in one go. Instead they may want to have something like a monthly income.
SWP is generally advised to be done from a liquid fund, though this option is available in equity and other category of funds too.
However, since one has had to tide over the market fluctuations to build a corpus, it is advisable to switch entire funds into much less riskier liquid funds and then opt for the systematic withdrawal.
The advantage of this option is that it will give an investor monthly income besides keeping the remaining capital safe and also earning higher returns than the savings bank deposits.
This is another innovation in the way one can plan investment in a mutual fund. Under this option, an investor can set trigger based on the available options so that as and when the trigger hits, the defined amount (total amount/apprecia tion/other) will move from source scheme to a target scheme.
The trigger can be based on the market or fund depending upon the options available under a mutual fund company. For example, let us say an investor has certain investment in a liquid fund and has set a trigger for 5% downside in the equity fund so that the trigger is processed and the defined amount moves from liquid scheme to the target equity scheme.
Also, one may have an investment in an equity fund and the trigger is set at 10% appreciation. As and when the target trigger is hit, the defined amount will move from source scheme (i.e. equity fund) to the target scheme (i.e. liquid). However, as and when this trigger is executed, it will attract loads as defined in the scheme features.
The trigger option helps an investor immensely who does not track fund performance and is not looking at extraordinary returns. Another advantage is that this option disciplines investment strategy. The trigger option varies from one fund house to the other.
However, before you choose this option make sure you’ve understood it fully and only if it matches with your investment strategy.
Value Averaging Investment Plan
Also called Variable Transfer Plan (VTP), is a very innovative product and works similar to an STP in the sense that the lump sum is put into a liquid scheme (source scheme) and depending on the fund value appreciating or depreciating variable amounts is transferred to an equity scheme (target scheme) subject to minimum investment requirement of the scheme.
Under this plan, higher amount is invested when the markets are low while lower amount is put in when the markets are positive thereby optimizing gain from market volatility. It is always advised by market experts to invest more when the markets are low and less when the markets are high, but to put it into practice is really difficult.
Now, with this plan one can actually achieve this without even keeping any significant track of the markets. You only need to decide on the target amount in each month and the date of investment in the target scheme.
Let’s understand this with the help of an example, Mr A and Mr B have investible surplus of Rs 60,000. While Mr B decides to put it in an equity scheme directly, Mr A opts going for VIP/VTP putting the money in a liquid scheme and transferring certain amount into the equity scheme such that on the transfer date his fund value is 5000 x number of months, i.e., 5,000 in the 1st month, 10,000 in the second month, 15,000 in the third month and so on.
Mr B invests in equity scheme on the date of first transfer of Mr A, so effectively both have started investment at the same time.
Let’s see how much returns both manage to get after 12 months. In case of Mr B he invests the entire Rs 60,000 in an equity scheme with an NAV of Rs 10 and so gets 6,000 fund units. At the end of 12 months, the NAV goes up to 10.46 and so he manages to reap profit of Rs 2,760 i.e. 4.60%.
In case of Mr A however, if he continues to transfer the sum equivalent to 5000 x number of months into an equity scheme the remaining amount in the liquid scheme after transfer through VIP/ VTP would be Rs 9,006.53. This when added to the total returns from investing in an equity scheme comes to Rs 69,006.53. Let’s see how.
Assuming the NAV of the equity fund on the 12th month to be 10.46, if Mr A continues to transfer the sum equivalent to 5000 x number of months into an equity scheme, at the end of 12 months the total units he would accumulate would be 5736.14, which when multiplied with NAV of 10.46 gives the total investment of Rs 60,000.
This leaves him with the total amount, combining both liquid and equity schemes, of Rs 69,006.53, a net return of 15.01%.
There is a considerable variation in the returns generated b y Mr and Mr B mainly because of variable investment patterns. However, though VIP is a very effective way of investment, it is being currently offered by a handful of AMCs.