The current turbulent times in the market marked with extreme volatility is unnerving several investors. And if you have lump sum money to be deployed the challenge increases manifold. At such times, the advice provided by experts is to stagger the investment amount by way of Systematic Transfer Plan (STP) rather than opt for one-time investment. In an STP, the investor invests the lump sum amount in a debt or hybrid fund and thereafter provides instruction to the fund house to systematically transfer a fixed sum to an equity fund over a period of time. This arrangement ensures that the base amount does not face undue volatility but at the same time is being invested into equities. Also, the investor gets the benefit of cost averaging.
Now, one of the leading fund house has brought an innovation to this setup in the form of a feature known as Booster STP. As a means to take advantage of the volatile times, what Booster STP does is that the amount transferred every month is variable in nature. The variation is basis the market condition which is gauged with the help of an in-house Equity Valuation Index (EVI). Through this setup, an investor can generate higher returns than a regular STP would yield, especially during volatile times.
A Booster STP is an enhanced systematic transfer plan wherein unit holders, based on market valuations, can opt to transfer variable amounts from the source scheme (debt/hybrid) to the target scheme (equity). Investors need to provide a base installment amount that they want to transfer to the target scheme. Basis the output of the EVI, Booster STP can vary the transfer amount from 0.1x to 5x of the base amount. For instance, if the base amount is Rs 10,000, the transfer amount can be anywhere between Rs 1000 (0.1x) and Rs 50,000 (5x). When the market valuation is cheap, higher amounts will be transferred and conversely, when the valuations turn expensive, the transfer amount is reduced. In effect, Booster STP aids in accumulating more units when market is cheap and vice versa.
Relevance of Booster STP in current times
Volatility in the market does impact investors' investment behaviour. Though volatility is an opportunity to create long-term wealth, majority of investors choose to stay away from equity investing during tumultuous market situations since they find it difficult to take an informed decision at such times or is unable to cope with the temporary losses seen in the portfolio.
With the dynamic amount transfer feature, Booster STP can aid an investor to make the most of current market volatility. Investors no longer have to worry about market valuation, how much portion of the much should be invested etc. The dynamic feature of Booster STP will take care of all these aspects while giving you the dual benefit of rupee cost averaging and value averaging – which is both an effective and efficient approach to investing. At the same time, it also keeps an investor away from behavioural biases such as greed and fear.
Very often in a bull market, due to greed investors tend to deploy lump sum into equities in one-go in the hope of not wanting to miss on the potential gains. But when the tide turns, the gains may get wiped out fast and this leads to negative investment experience. On the other hand, fear keeps an investor away from making any investment during volatile times. Both these traits are detrimental in the long term wealth creation journey.
Over the last one year, the equity market has come off highs accompanied with volatility. So, if an investor had to deploy Rs. 12 lakhs in July 2021, let us consider how that person would have fared using regular STP and Booster STP. The assumption here is for traditional STP he would have invested Rs. 1 lakh each for the next 12 months. As of June 2022, the worth of investment made through regular STP would be Rs 11.21 lakh - a loss of Rs 79,000. However, through the Booster STP route, the valuation would be Rs 12.13 lakh. This clearly shows how Booster STP aided an investor to make the most even during volatile times.