DO YOU WANT TO invest lump sum in equity markets but unsure how to go about it? Or else do you have a lump sum amount waiting to be invested in a manner where you can make the most of a volatile market? If the answer to either of the question is yes, then it is time you are introduced to a feature by the name of Booster STP. This is a solution put together by one of the leading fund houses to get investors out of the lump sum investing fix.
Before we talk about what a Booster STP is, let us look at how a traditional STP functions. Here, the investor parks lump sum amount in a debt fund (source fund) and sets up an STP into an equity fund (target fund). Assuming that the frequency of transfer is monthly in nature, after STP is set up, on a particular date every month, the fund house will automatically transfer a specific amount from debt fund to equity fund. As a result, you get to experience the same advantage of SIP while earning from the debt scheme as well.
Now, let us consider Booster STP. This is an improved Systematic Transfer Plan that allows an investor to transfer varying amounts from source fund to target fund at predetermined intervals based on market valuations. For determining market valuation, the fund house will use an in-house developed Equity Valuation Index (EVI), based on which the transfer multiplier will be determined. The multiplier ranges from 0.1x to 5x and is determined using EVI. As a result, this mechanism allows an investor to make the most of market volatility.
At the time of signing up, an investor provides a base installment amount which is meant to be transferred to the target scheme. The actual transfer amount can vary between 0.1x to 5 x of the base instalment amount. When the equity valuation index signals that the market is expensive, Booster STP will allow only a small portion (0.1x) of the base instalment to be transferred. In contrast, if the equity valuation index signals that the market is cheap, a significantly higher portion (5x) of the base instalment will be transferred. For instance, if the initial instalment is, let’s say, $1,00,000, the investment would range from $10,000 to $ 5,00,000 (0.1x to 5x), depending on the market valuation.
WHY BOOSTER STP MAKES SENSE IN THE CURRENT SCENARIO
There is a fair amount of consensus that, over the next one year, the equity market will be volatile. So, if you are a lump sum investor, opting for a variable transfer amount works out to be better that a fixed amount, thereby making the most of the volatile times. With the help of Booster STP, an investor need not worry about the right investment amount and the right time to invest. Instead, let the model guide the fund house to make an impartial investment decision.
The Booster STP feature is just a year old as it was launched in July 2021. So, if one were to compare how Booster STP has stacked up against traditional STP over the last one year, the results is startling at best. The assumption here is that the investor has invested Rs12 lakh in the source scheme (ICICI Prudential Savings Fund) in July 2021. If one were to go the traditional STP way, an amount of Rs1 lakh was transferred every month for the next 12 months. However, with Booster STP, the multiplier over the last one year varied from 0.1x to 0.4x and hence also the transferred amount.
As of June 2022, the investment amount in case of traditional STP will be worth $11.20 lakh as compared to $12.13 lakh generated by the Booster STP. The difference in investment value under the two methods is $93,000 or 8.29 per cent. This clearly shows how Booster STP could provide sizeable outperformance to its investors.
To conclude, if you are looking to deploy your investment in a manner by which you can benefit from market volatility, Booster STP feature is a worthy consideration.
Writer is partner, Hindustan Capital