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More than just an SIP

Fund houses have tried different innovations to supplement the conventional SIP

If you are a mutual fund investor, you need no further explanation on what an SIP is. Every fund house aggressively preaches the benefits of systematic investment to whoever gives an ear. Its not-so-common sibling is the STP. But if you thought that this was all there was to fund investing, other than the invest-at-one-go style, which we caution against, by the way, it's time for an update.

Fund houses have donned their creative hats and structured innovative ways to supplement the conventional SIP. Here's what is available in the market.

SIP
It's easy, it's convenient and it works for the investor. In a systematic investment plan (SIP), a fixed amount is invested in a fund at a predetermined date, which could be either monthly or quarterly. Not too long ago, daily SIPs were also introduced.

STP
A systematic transfer plan (STP) is a combination of a systematic withdrawal plan (SWP) and SIP. Under a STP, a pre-determined amount is redeemed every month from the fund at regular intervals. For instance, the fund house withdraws a fixed amount at a pre-determined frequency from either a debt or liquid fund, where the investor has invested his/her initial corpus, and channelizes the investment into another fund chosen by the investor. Generally there are two asset classes at work. The initial corpus could rest with a debt or liquid fund and periodically money may be transferred to an equity fund.

DTP
The dividend transfer plan (DTP) resembles the dividend reinvestment plan (DRIP). The dividends that an investor earns in a scheme, gets reinvested in another scheme from the same fund house. Not the same scheme (like dividend reinvestment), just the same fund house. An investor can essentially structure his investments in such a way that dividends from, say, his debt fund get reinvested in an equity fund of his choice.

VIP
The value investment plan (VIP) was introduced by Benchmark Mutual Fund. Before investment is initiated, a target rate of return that has to be achieved monthly is decided. After the first installment, subsequent investments made are based on a formula, which is that the amount invested will be the difference between the target and actual value of investment (see illustration).

So if the market movements are below the desired rate of return, subsequent investment rises

to make up the short fall. Benchmark Mutual Fund also has value transfer plan (VTP), where the same strategy is implemented by withdrawing from a debt fund and re-investing the proceeds in an equity fund.

FLEX STP
Introduced by HDFC Mutual Fund, this one is a compromise between SIP and VIP. The initial amount is invested in a debt or liquid fund. After that, it's either the pre-determined installment amount or the difference between amounts invested and value of the invested amount. Like VIP, if the market is on a free-fall your subsequent investments can easily exceed your total planned investment.

Smart STEP
This one, introduced by Reliance Mutual Fund, follows an in-house quantitative model which can judge the “current positioning of the market” based on its intrinsic volatility. Even though the fund house explicitly hasn't stated it, it implicitly suggests that the model can estimate whether the market is over- or under-valued. On a pre-determined day, accordingly to the output from the model, a low, medium or high amount will be invested in the fund. Since they haven't been very forthcoming in sharing the details of the model, we are unable to determine the efficacy of it.

FLEXINDEX
Conceived by HDFC Mutual Fund, investors have to choose four levels of the index at which they would like to deploy their money. If that level is crossed or met, either one-fourth of the total would be invested or a percentage of the total as specified by the investor. If you take a look at our illustration, we failed to deploy our planned investment in any one of the years. So a comparison with other investment strategies is unfair.

SIPs and STPs are not fancy, but they are easy to grasp and get the job done. As in, they don't let the market sentiment affect the investment decision. Their premise is based on the underlying theory that in the long run, equity can deliver superior returns if investments are done rationally in a disciplined fashion.

These innovations are more sophisticated in the sense that the amount invested can be tweaked and the investment can also be timed to some extent. But frankly, after we did a comparison, they appear to be more gimmicky than anything else. To top it all, they will throw your equity:debt planned allocation out of the window.

How they stack up

  SIP    VIP    FLEX STP  
  2008  2009  2008  2009  2008  2009
Invested (Rs) 12,000 12,000 18,450 9,053 17,232 11,214
End Value (Rs) 8,418 16,706 14,480 13,196 13,444 15,481
Return (%) -49.71 79.07 -43.83 88.43 -43.98 77.78

Investment
Where? In the Sensex
When? The first of every month over 2008 and 2009
Planned amount? Rs 12,000/annum

Observations

  • VIP certainly yielded more than SIP. The more frequent the systematic investment, the better.
  • The catch where VIP is concerned is that one cannot plan how much to invest. We targeted Rs 12,000 in 2008 and ended up investing Rs 18,450 and still ended in the red. Though Benchmark Mutual Fund does offer this plan with a cap on the maximum investment, it's more of a compromise rather than a refinement to its shortcoming.
  • FLEX STP's performance was not too impressive.