Optimising Systematic Transfer Plan

With the equity market behaving the way it is, many investors are in a dilemma about whether to invest fresh money or not, and how much and when. A systematic transfer plan (STP) can solve the dilemma. Historical data shows discipline helps in systematic, phased-out investing. That’s because at relatively lower market levels, you end up buying more with the same quantum of money.

The concept of systematic investment plan (SIP) is similar to giving post-dated cheques for future payments. Unlike in an SIP, STP is where you have the money today, which you can park in a defensive (liquid or debt) mutual fund (MF) scheme and invest it systematically. Here, the post-dated cheques are pegged not to your future earnings but to the corpus in the defensive fund, called the source fund.

From the source fund, equated amounts are moved to the target fund, which is, typically, an equity fund. It can help control the urge to time the market.

Optimising STP

One approach to using an STP could be that, as against lump sum investment, you invest a higher instalment than usual when market levels are relatively lower, and vice-versa.

If you do this yourself, you will be tempted to time the market. For example, during a correction, you may want to wait a bit longer before increasing your instalment. But mutual funds can also provide a solution.

For example, ICICI Prudential Booster STP, launched in August 2021, which has multiple debt funds as source funds and multiple equity funds as target funds. Under the Booster STP method, they cut the instalment significantly at higher market levels and raise it manifold on market corrections. They have an internal Equity Valuation Index for taking this decision. The ICICI Equity Valuation Index is calculated by giving equal weights to price-to-earnings (PE), price-to-book (PB), government securities-to-PE, and market cap-to-GDP ratio. The STP amount is variable, and the range is 0.1 to 5 times the base or usual amount.

Another example is Aditya Birla Sun Life Asset Management Company’s recently launched Turbo STP. It follows an in-house Equity Valuation Multiplier (EVM) model based on valuation ratios (PE, PB, yield gap), trend ratios (linear momentum, momentum reversal), volatility ratios, etc. The multiplier range is 0.2 to 5 times.

Effectiveness Of STP

As mentioned earlier, disciplined investment is better than investing a lump sum. Let us look at an example. Suppose Rs 12 lakh was invested in a source fund (Crisil Short Term Fund Index) in January 2019, and an STP of Rs 1 lakh per month was opened. The target fund was the Nifty 50 Index Fund. As on June 30, 2022, this value would have become Rs 17.38 lakh, a compounded annual growth rate (CAGR) of 11.17 per cent. To gauge the efficiency of the STP system, let us take the mid-point of 2019 as the start date of the Nifty 50 calculations. As on July 1, 2019, Nifty was at 11,865 points, and on June 30, 2022, it was at 15,780, a CAGR of 10 per cent. Here, the alpha or extra return of the STP mechanism over lump sum investment is 11.17 per cent over 10 per cent CAGR.

As against a regular STP, let us say Rs 12 lakh was invested through the ICICI Prudential Booster STP in January 2019. The source and target funds are the same as in the prior instance. The base amount of STP is the same as earlier. The multiplier on the base amount in the Booster STP mechanism is 0.1 to 5 times the base amount, based on the market movement. As of June 30, 2022, the value would have been Rs 21.46 lakh, a CAGR of 18.07 per cent, as per back-tested data. The reason for this robust alpha—18.07 per cent over 10 per cent or 11.17 per cent—is that in 2019, the STP amount was lower than Rs 1 lakh a month, driven by their internal index. In early 2020, the STP amount was over Rs 1 lakh per month due to the steep market correction.

Conclusion

You may invest a lump sum if you have a long-term horizon, say, 10 years or 20 years. But, if you have a medium-term horizon, say, 5 or 7 years, an STP may be a better option to help optimise your returns.

The writer is a Corporate Trainer and Author