‘Buy low and sell high’ is a tenet preached by market gurus. But practicing this is quite difficult. Even if you know enough about the markets to gauge when valuations are expensive and when they are cheap, will you be able to act at just the right time? Doubtful.
A few years ago, fund houses came up with an automated, if somewhat complicated solution to this problem in the form of Flexible Systematic Transfer Plans (Flex STPs). Flex STPs allow you to park money in one sets of funds - say debt or liquid funds, and transfer it into equity funds, based on preset market triggers. The size of the instalment is varied based on market levels or valuations. There is some disagreement among fund houses on whether valuation based flexible STPs can be called Flex STPs.
Market PE as trigger
Kotak MF’s Flex STP allows you to park money in debt funds and move it into equity funds based on the P/E (Price to Earnings) band of Nifty 50 Index. You can specify a regular SIP amount and a multiplier to this, to be invested at different market levels. So, if the Nifty PE is greater than 15, then your basic instalment gets invested. If the P/E is less than or equal to 15, then an amount greater than your regular STP amount gets invested. The default amount, at a lower PE, is 3 times the specified STP.
IDFC MF’s “PE STP” operates on similar lines, only it uses the Sensex PE instead of Nifty to trigger transfers into equity schemes. It allows investors to transfer an amount from the source scheme to the target scheme, based on the Price to Earnings of the Sensex. The PE is calculated based on the closing value of the S&P BSE Sensex on the date of STP, divided by the consolidated Earnings Per Share of S&P BSE Sensex companies. If this PE is more than 19 times, only the normal installment amount will be transferred. If the PE is between 16 and 19 times, twice the installment amount will be invested. If the PE is less than 16 times, 5 times the amount is invested.
Formula-based flex STPs
Other fund houses step up the STP amount if the investment value drops. A few years ago, the concept of Value Averaging was introduced by Benchmark Mutual Fund (later Goldman Sachs Mutual Fund). This allowed investors to increase their SIP amounts if markets fell and reduce them if markets rose. A new version of this is being offered as Flex STP.
Fund houses like HDFC, Axis and DSP BlackRock offers STPs between debt and equity schemes that vary based on the investment value each month. Based on pre-decided formula, the fund either transfers the pre-decided fixed SIP amount, or a multiple of that, whenever the market falls.
The flex STP amount is calculated by using the formula: Flex STP amount = (Fixed amount x number of instalments) – (market value of investments through flex STP so far).
Here's an example. Let's assume the fixed STP amount is Rs 1,000 and you have done 6 monthly instalments. Now, if the markets have tanked by 20%, Flex STP amount will be= (Fixed amount i.e. Rs 1,000 x number of instalments i.e. 6) – (market value of investments through flex STP i.e. Rs 4,800)= (Rs 6,000) – (Rs 4800) = Rs 1200.
Kindly note the Rs 4,800 figure is because of the assumption that your Rs 6,000 investments have lost 20% value.
In the month after markets tank 20 %, your STP will be Rs 1200, instead of Rs 1000.
If the amount resulting from the formula is lower than the fixed amount, then the fixed amount gets transferred.
We asked fund houses why the formula is so complicated. Officials said though the formula looks a bit tough at first, but it has been accepted by distributors and sophisticated investors, as a good way to invest more when market decline.
So, in HDFC MF Flex STP facility, unit holders of designated open-ended schemes of HDFC Mutual Fund can opt to transfer variable amount linked to value of investments under HDFC Flex Systematic Transfer Plan. HDFC MF says this helps get accelerated investments into the chosen equity oriented fund when markets are down. In a bullish market, one can continue with normal STP.
While SBI MF and Axis MF Flex STP are available for Monthly and Quarterly frequencies, frequency of transfer under HDFC MF’s Flex STP is Daily, Weekly, Monthly and Quarterly. In case of Birla Sun Life’s Value STP, the maximum amount of transfer under Value STP would be limited to twice the amount per instalment.
A good example of automated trigger would be Reliance MF’s Smart STeP. For this facility, you need to select any open ended liquid/debt scheme and any open ended equity scheme of Reliance Mutual Fund. Based on your asset allocation, Reliance MF would on its own calculate the monthly amount to be transferred under the selected plan, two trading days before the transfer date (10th of every month), based on what it calls ‘a scientific model’.
Reliance MF offers different SIP sizes to go with this facility with five different plans. Once you have chosen the option that best suits your needs, depending on how much the market moves up or down, it will be Reliance Mutual Fund that decides how much to transfer (low, medium or high amount) as per selected plan.