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Systematic Transfer Plan: Useful Tool in Choppy Markets
August 11, 2011

Immense volatility is making even seasoned investors second guess their investment decisions. At the same time, experts insist Indian equities are currently under bought. We evaluate STPs as a means of systematically entering a volatile market while the bulk of your portfolio earns stable returns.


Author : Niketa Agarwal



 Systematic Transfer Plan: Useful Tool in Choppy Markets

We all want to enter the market at the right time and gain the most in those falling markets. But how do we enter the market safely when it is taking a downturn and the negative sentiment is on loose. Is there a way to hedge ourselves from the market downturn and at the same time gain good returns on our investment? We present an illustration for your understanding.
As the name suggests, Systematic Transfer Plan (STP) allows you to transfer a part of your investment from one mutual fund to another. Based on a one-time instruction, a part of the portfolio will be redeemed from one mutual fund and invested in a second mutual fund.

Fundamentals of STP

To execute an STP, you can choose the fund from which the transfer is taking place (Transferor scheme or fund) and the fund to which the transfer is taking place (Transferee Scheme or Fund). It is important to note that you can only choose from those schemes that offer the STP option. Transfers can be made daily, weekly, monthly or quarterly depending upon the STP chosen by you and the options available with the AMC. The exact dates of transfer differ between asset management companies (AMCs). If you do not mention a date and frequency for the transfer, then the default STP date and frequency as decided and mentioned by the AMC is taken for the transfer.
The minimum transfer amount is dependent on the type of STP, the transfer interval and the AMC chosen by you. The transfer takes place in the form of units of the fund. Depending upon the NAV of the transferor fund, units corresponding to the transfer amount decided are redeemed and units of the transferee fund are purchased.    

STPs carry Entry and Exit Loads as per the respective schemes of the various AMCs.  There is no fixed entry and exit load for the STPs. You should have more than minimum investment amount in the transferor fund to start an STP.

Using the STP in Volatile Markets

STP is a useful risk mitigation tool which aims to provide better returns at the same time. It can therefore be considered when making investment decisions in volatile market conditions.                                                                

STP Performance over Downward and Upward Trends in Markets

Investors Amar, Beena make their first investment at the same time.

Amar: Rs. 100,000 in a debt fund* (DSP Money Manager Fund#) and a monthly STP of units corresponding to Rs. 3000 to equity fund* (DSP Small and Midcap Opportunities Fund#) for 15 months.

Beena: Rs. 100,000 in an equity fund of the same AMC without opting for an STP. So, she has invested Rs. 100,000 in DSP Small and Midcap Opportunities Fund for the same time period (15 months).

Illustration: (Source: ICRA STP Calculator)

To make the portfolio behaviour clearer, we have used an STP calculator to give us actual valuations of Amar and Beena’s portfolios.
At the end of 15 months, DSP Money Manager Fund accounts for 55% of the amount invested and the DSP Small and Midcap Opportunities Fund accounts for 45% of the invested amount due to transfer of fund units.

Downward Market

Let’s say, the markets are extremely volatile when they enter it. After a few months, markets start exhibiting downward volatility. The negative sentiment sets in and there is panic all over the markets. A lot of investors are witnessed selling their investment and investing into gold with the simultaneous sudden rise in gold prices.
In this scenario, Amar gets the best returns out of the two. This happens because Amar is earning positive returns from the debt part of his investment, even though the STP in the equity fund reduces his overall valuation. Beena’s lump sum investment in equities reacted sharply to the negative sentiment delivering negative returns.

Upward Market

This is a recovering market.  A lot of good news about GDP, moderating inflation, corporate profitability is coming in the markets and the brokerage houses are bullish about the stocks.
In this scenario, Beena gets better returns than Amar. Beena’s lump sum equity investment gives her the strongest returns.  Now, Amar’s portfolio delivers the less returns as a big part of his portfolio is in debt funds.

Fund Name

Downward Market [December 2007 to March 2009 ]

Upward Market [April 2009 to June 2010]

 

Absolute Returns (as at 8 August 2011)

DSP Small and Midcap Opportunities Fund (45% of Amar’s portfolio)

73%*

28%*

DSP Money Manager Fund (55% of Amar’s portfolio)

20%*

11%*

DSP Small and Midcap Opportunities Fund (100% of Beena’s portfolio)

23%*

63%*

 As it can be seen from the table, in the case of market downward volatility, STP Portfolio delivers stronger returns in a downward market (73% from STP into DSP Small and Midcap Opportunities Fund and 20% from DSP Money Manager Fund) than lump-sum investment which earns only 23%.

In an upward market, however, Lump-sum Portfolio earns higher returns.
*Note: The returns calculated here in all the cases are absolute returns depending on the market conditions at that time.  

The charts below show the NAV movement during the time periods taken.

Chart 1: NAV trend in the case of Down market

Source: iFAST Compilations

Chart 2: NAV trend in the case of Up market

Source: iFAST Compilations

Points to Note

An STP from a debt fund into an equity fund can be used in volatile markets that are close to the bottom. In this case, as the markets regain, you can get good returns from the equities and can tap into the market volatility. At the same time, your risk is hedged as a part of your investments are in debt.
However, in upward trending markets, STPs do not fetch competitive returns. When the markets are steadily moving up, a lump sum investment in equities is more favourable.
Even though when the market is at its peak, you can still do a STP from an equity fund to a debt fund. This is because, you can book your profits partially from equity holdings and minimise your risks by transferring your equity gains into a debt fund.

Types of STPs

  • Fixed STP (FSTP):  In FSTP fixed amount of money as mentioned by you is transferred.
  • Capital Appreciation STP (CASTP): In CASTP the appreciated money from the investment gets transferred. However, in this case if the appreciated amount is less than the transferred amount opted by you then it is adjusted from your original invested amount.

Advantages

  • STP allows you to gradually transfer in an equity fund while you are invested in a debt fund. Therefore, you can get the returns of the equity fund you are transferring into and at the same time you are safe as a part of your investment remain in debt.
  • STP also allows you to gradually transfer back from an equity fund to a debt fund. Therefore, when there are chances of market exhibiting a downward trend and there is huge risk involved then you can gradually transfer your investment into a debt fund. This assures safety to the investment. (However, this may be offered only by few AMCs not all the AMCs offer this advantage.) Example: offered by Kotak Mutual Fund.

Disadvantages

  • There are a minimum number of installments that you have to do if you opt for an STP. The minimum number of installments is dependent on the AMC and the periodic interval of the installments.

For example: HDFC has a minimum of 6 installments under weekly FSTP, monthly FSTP and CASTP. It has minimum 2 installments for Quarterly FSTP and CASTP. (Source: HDFC STP Enrollment Form)

  • Some of the Equity schemes may also have a lock-in period depending on the scheme and the AMC chosen by you.
  • Entry and Exit Loads will be applicable on you depending upon the scheme and the AMC chosen by you.
  • Securities Transaction Tax (STT) @ 0.25% is applicable on the equity funds at the time of redemption or switch to other schemes.

Conclusion

STP is ideal for investors who want to invest lump sum into debt and at the same time want some equity exposure in order to gain higher returns on their investment. Alternately, unlike SIP, STP can work as a tool to transfer from equity fund to debt scheme giving you the dual advantage: earn profits from your equity investment and preserve capital by moving into debt.
It is also a useful tool in the case of downward volatility of the market, when investors believe that the markets will rise soon and so want to enter the market low and take advantage of the present market conditions.  


# This fund has been chosen for no specific reason and only for example purposes. This is in no way a recommendation of the said fund.


Disclaimer: iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's scheme information document including statement of additional information. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer on the website.Please read our disclaimer in the website. Risk Factors: Mutual funds, like securities investments, are subject to market risks and there is no guarantee against loss in the Scheme or that the Scheme’s objectives will be achieved. As with any investment in securities, the NAV of the Units issued under the Scheme can go up or down depending on various factors and forces affecting capital markets. Past performance of the Sponsor/the AMC/the Mutual Fund does not indicate the future performance of the Scheme. The name of the Scheme does not in any manner indicate the quality of the Scheme, its future prospects or returns. Please read the Statement of Additional Information and Scheme Information Document carefully before investing.



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