By Siddappa Doddalingannavar
To meet long-term goals, it is always suggested that one stay invested for the long term. But market vagaries are such that one does see periods of expensive and cheap valuations, accompanied by periods of volatility. In such a setting, emotions, no matter how seasoned an investor is, do impact decision-making.
Even if an investor has lumpsum money to invest, making the right investment decision when the market is volatile is never easy and entails high risk. While a traditional systematic transfer plan (STP) could be a good option, it may fail to capture fully an underlying opportunity. In such a period what may work the best is relying on features like the Booster STP.
In a traditional STP, an investor parks the lump sum money in a debt fund (source scheme) and instructs the fund house to transfer a fixed sum of money every month to an equity fund (target scheme) of his/her choice. But in the case of a Booster STP, the amount transferred every month to the target scheme will be variable in nature. The amount can vary in the range of 0.1x to 5x the base STP amount.
For deciding on the multiplier, the fund house will use a model-based Equity Valuation Index to decide if the market is cheap or expensive and accordingly apply the multiplier to the base STP amount. For example, if the base STP amount is Rs. 10,000 per month, then the final transfer amount can vary from Rs. 1,000 (0.1x) to Rs. 50,000 (5x). This allows an investor to benefit from market volatility.
History shows that there are times of extreme market pessimism such as the subprime crisis of 2008, European crisis 2011-2014 or Covid crisis. In each of these instances, equity markets across the globe and in India corrected significantly and consequently, the valuations were very cheap. During such periods, Booster STP tends to invest more and this helps give them an edge over traditional STP.
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If one were to consider the last one year when the market has been fairly volatile, let us see how Booster STP would stack up against traditional STP. If you had a lump sum of Rs. 12 lakh and would have gone the traditional STP route and invested Rs. 1 lakh each over the next 12 months, then as of July 2022, that investment would be worth Rs. 11.2 lakh, i.e. a value erosion of 7.17%.
On the other hand, if instead of traditional STP, the investor had opted for Booster STP, then the investment value today would be Rs 12.13 lakh, i.e. an outperformance of 8.29% or Rs 93,000. This performance was made possible because in 10 out of 12 months, Booster STP invested just 0.1x i.e. Rs 10,000 and in the 11th and 12th month, as the markets corrected, the transfer amount rose to Rs 20,000 and Rs 40,000, respectively.
The transfer frequency under Booster STP can be done on a weekly, monthly and quarterly intervals. At present, apart from ICICI Prudential, there is no other fund house which offers a feature similar to Booster STP. So, if you are an investor looking to deploy lump sum investment and is not sure whether to wait on the sidelines for the market to correct further or to go ahead with investment, Booster STP emerges as a viable solution.
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Another advantage of this feature is that you need not worry about behavioural biases coming in the way of your investment. Most often while deploying lump sum investment, investors tend to get influenced by greed and fear and go about investing in a haphazard manner. Also, the model-driven arrangement of Booster STP ensures that one need not fear about any human bias even on the part of the fund manager. In effect, this is the most logical and mechanical way of investing in an optimal manner in a volatile environment. To conclude, use features like Booster STP to befriend market volatility.
(The author is Founder, Mulberry Finserv)
Disclaimer: This is the author’s personal opinion. Readers are advised to consult their financial advisors before making any investment.