Use flexible STP, variable SIP to tackle market volatility

These stay invested for at least 3-4 years to capture market trends

Financial planners always advise you to invest in stock markets through systematic investment plans (SIPs) because it helps deal with volatility — a common feature in stock or mutual fund investing. And the typical argument is that when markets go down, leading to falling net asset value (NAV) of schemes, the SIP will help garner more units. These additional units will earn better returns when markets turn around. 

But now there are strategies such as, flexible systematic transfer plan (STP) or variable SIP that investment advisors are recommending. Tarun Birani, founder and CEO, TBNG Capital Advisors, a Sebi-registered investment advisor, has been advising his clients to invest in mutual funds through flex STPs.

This could be a good strategy in a situation where there are expectations of volatility, as there is currently. 

Roopali Prabhu, head, investment products, Sanctum Wealth Management agrees. “STPs help to reduce risk due to volatility. Currently, there is global economic uncertainty arising from several events. We like STPs or flex STPs related to price-to-earnings (P/E) ratio or price-to-book (P/B) value of a scheme,’’ she says. These parameters help increase/decrease allocation to the scheme. 

In an STP, a lump-sum amount is first invested in a liquid fund. From that corpus, smaller amounts are transferred to an equity fund at regular intervals. So, if you have Rs 1.2 lakh, invest that in a liquid fund; from that Rs 10,000 is transferred every month to an equity fund. The money in the liquid fund earns more interest than a bank fixed deposit. And by investing regularly in the equity fund, the risk is spread as compared to investing at one go. In the flex STP, you can vary the amount, depending on the market conditions. For instance, if it is invested according to the P/E parameter, if the P/E fall, the instalment will rise and vice-versa. “The challenge for any investor is how to beat volatility from a pricing perspective. STP helps in rupee cost averaging and managing the volatility in the market,” says Peshotan Dastoor, national sales director, Franklin Templeton Investments-India.

STP allows variations such as daily, monthly, or quarterly investment. It is also possible to invest only the capital appreciation you earn on your initial investment. So, if you invest Rs 1 lakh in the liquid fund, you can say that only anything over and above this amount should be transferred to the equity fund. “An STP would not be useful if the market is showing a clear trend. For instance, if the market has corrected significantly and offers a lot of value, then it makes sense to allocate a sizeable amount, instead of small amounts,” says Prabhu.

If you don’t have a lump sum to invest in a liquid fund for the STP, you can look at a variable or flexi SIPs, which allow you to increase or decrease the allocation based on the market conditions or the surplus you have, says Vidya Bala, head, Mutual Fund Research, FundsIndia.com. You can set the amount to be invested on a regular basis, and the range within which the amount should be increased or decreased. This can be set assuming a certain rate of return. But remember that not all fund houses offer the option. Also, for STP or SIP to capture market trends, you must be willing to stay invested for at least three-four years.