Beating Benchmark, systematically….

A systematic transfer plan’s just right, but you can SIP it, too

Indeed, in times of volatility and uncertainty, it is wise to move cautiously, even lie low for a while and take a long-term view of things. And could there be a strategy all investors could follow, generally? There is.

Many investors typically invest when the markets are bullish and start selling after the slide is well underway. In effect, wrong timing both ways.

Go for an STP…

A right way is to go for a systematic transfer plan (STP) when the markets are unfathomable and the investor has money to invest.

This can be seen as a systematic investment plan (SIP) turned inside out. While in an SIP the money is invested in small lots that accumulate to a tidy sum over a period, in STP, a fixed amount is invested and from it small sums are farmed out and invested in other funds.

To implement this strategy, the investor needs to park the funds in a liquid plan. Now, liquid plans are debt funds that protect the corpus from volatility, as there is no exposure to equity.

One could choose a bond fund where the dividend distribution tax is the least - 14.1%.

Under the dividend option, whether weekly or daily, the amount that comes in ultimately is tax-free in the investor’s hands since the mutual fund would have paid dividend distribution tax before distributing the proceeds.

The investor could now opt for a STP, which transfers the funds in small lots, to some designated equity fund over a period.

Let us assume Dinesh invests Rs 100,000 in Birla sun life Gilt Plus - Liquid. He then opts for a STP of Rs 10,000 every week into Birla Sun Life Equity Fund, over a 10 week period, thereby reducing the risk of adverse timing of investment.

Dinesh could also opt for subdividing his investments further into three of Birla funds, viz. to get better diversification.

And if the market bottoms out midway and he wants to deploy the rest of the available amount in the liquid fund, he could stop the STP and opt to switch the entire balance to a fund of his choice. This way, he can reduce the risk to a great extent.

There is another option in STP - the reverse option. Under this, a small amount is transferred regularly into a debt fund to reduce the exposure in the equity-oriented fund.

When the market bottoms out, the entire amount in the debt fund can be redeployed in equity funds.…or start SIP…

SIP is an evergreen option available to the investor. The strategy always works, unless the markets keep falling, for years on end.

This way, the investor gets a lower average unit price over time and virtually does away the timing risk.