2nd S..Systematic Transfer Plan

Most of the people wants to invest lump sum amount in mutual funds (Like Bonus, Arrears in salary, or any other income received from other sources..)but they are scared to put all of it in one go because the markets are at an all-time high.so to reduce the risk involved in investing there is 1 method or strategy which is known as Systematic Transfer Plan .So Let’s see

What is STP?

STP is a variant of SIP. STP is essentially transferring investment from one asset or asset type into another asset or asset type. In STP, a fund house allows investors to invest a lump sum amount in 0ne scheme (Debt Mf) and transfer regularly a pre-defined amount into another scheme.(Equity or Balance Mf) The transfer happens gradually over a period.

How STP Works?

Suppose you want to invest 1 Lakh in Equity Mf. Your 1st step will be

  • Choose the liquid or ultra-short term mutual fund.(If its other debt fund make sure there is no exit load )
  • Choose the Equity or Balance Mutual Fund which you want to transfer money.
  • Decide the amount to be transferred and frequency of the transfer (Daily, weekly ,monthly or quarterly )

For example you can decide to transfer 10000 every month on 10th of every month for 10 months or if 5000 than 20 months.

Benefits of STP

  • STP helps to keep a balance of Risk & Returns
  • Money invested in liquid fund earns interest till the time it is transferred to equity fund. The returns of liquid fund is usually higher than saving bank account.
  • Your money is invested in liquid fund this mean you can sell it at any time if you want. Hence it works like a Emergency Fund.
  • Since it is similar to Systematic Investment Plan (SIP),STP also helps in averaging out the cost of investors by purchasing fewer units at a higher NAV and more at a lower price.

Types Of STP

Fixed STP: – In Fixed STP, amount of transfer (from one mutual fund to other) is fixed.

Flexi STP: – Under Flexi STP amount of transfer is variable. The fixed amount will be minimum amount and variable amount depends on volatility in market. For E.g If Nav of the fund decrease you can invest more amount and if NAV of the fund increase you can invest less amount.

Capital Appreciation:-Under this type, the investor takes the profit part out of one investment and invest in other.

Key Points to remember.

  • Typically, a minimum of 6 such transfers are to be agreed n by investors in STP.
  • STP attracts short term capital gain tax because every transfer is considered as redemption in the liquid mutual fund. If debt funds are sold before 3 years, the gains are treated as short term capital gains and taxed according to income tax slab applicable to investor.
  • You can bring down tax liability marginally by opting for the dividend reinvestment option in the liquid mutual fund. Dividends are tax free for investors but mutual fund pay a dividend distribution tax of 28.84% on dividend declared.
  • If you want to invest in ELSS schemes and have lump sum money ,better put it in a liquid mutual fund and do

 

Next Article will be on 3rd S…Systematic Withdrawal Plan (SWP)

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Do you know 3s of Financial Planning?

Today I want to explain 3 very common terms used in mutual fund investing which is also called 3 S of Financial Planning.

  1. Systematic Investment Plan (SIP)
  2. Systematic Transfer Plan (STP)
  3. Systematic Withdrawal Plan (SWP)

These are methods of Systematic investing and withdrawal in mutual funds. While most people know what is SIP is, majority are not aware of what STP & SWP is. These are important element of financial planning. So let’s understands how these 3 S works.

Systematic Investment Plan (SIP) 

What is SIP & How it works?

This option is similar to like Recurring Deposit in bank or post office.. Under this option you can invest fixed amount in mutual funds on particular date of the month. You can fix the amount according to your financial goals as well as you can select date also and invest it regularly. When you invest for the first time in mutual funds you would get folio number like your bank account number. Your money is auto debited (ECS) from bank account or you can give postdated cheques .After purchase in particular scheme you will get certain number of units based on the ongoing market rate which is called NAV of the day. Every time you invest money, additional units of the schemes added to your account. Whenever you make an investment in mutual fund scheme, the fund house has to send you an account statement providing details of holding.

Advantage of Systematic Investment Plan

  • It help to develop saving habits.
  • One can start investing in SIP with very low amount of Rs.500 or Rs. 1000
  • While Starting SIP, you have to choose date and no of installments-you can choose whatever is convenient for you.
  • There is no fixed tenor for running SIP ,Once the SIP tenure is fixed ,it can stopped in between or could be continued even after the tenor by placing the request with respective mutual fund company.
  • Full and Partial withdrawal is possible during or after the SIP tenor .Only ELSS mutual funds have 3 years lock in period and there is some exit load in some mutual fund schemes depending upon type of the scheme.
  • Simple, Convenient and easy to monitor. You do not have to take time from your schedule to make your investments. With a completed application form, one can just submit post-dated cheques or avail the Easy Pay (auto debit) ** facility and relax. You can monitor your progress of investment through periodic statement of accounts.
  • Rupee cost averaging: Investors investing fixed amount of money every month towards any investment vehicle allow them to buy more units or stocks when the price of the units (investment) is lower. This reduces the average cost of purchasing of the financial asset over time.Considaring a long term investment approach ,rupee cost averaging can even out any market ups and down in the long term, allowing investor to gain maximum benefits on his on her investments over time.

Illustration

Month Investment Amount             NAV     No.Of Units
JAN           2000             15          133.33
FEB           2000             13          153.84
MAR           2000             16          125.00
APR           2000             14          142.85
MAY           2000             17          117.64
JUNE           2000             19          105.26

Total Units                                                                                                                        777.92

From above table we can see at every market correction an investor would end up buying more number of units. When the unit price goes up, he tends to gain.

What are documents required for SIP investment?

You need to provide KYC documents along with SIP application form .KYC documents include PAN card, address proof and identity proof.

Disclaimer

 Mutual Fund Investments are subject to market risk ,read all scheme related documents carefully.  

Next Article will be on 2nd S …Systematic Transfer Plan

MUTUAL FUNDS FAQs

What is mutual fund?

A mutual fund is essence of Trust with a sponsor. They are registered with SEBI who approves the Asset Management Company managing the funds. In other words mutual fund is a mediator that brings together a group of people and invest their money in stocks, bonds and other securities.

What are benefits of investing in Mutual fund?

  • Professionally managed: The pool of money collected by mutual fund is managed by professionals who possess considerable expertise, resources and experience .Through analysis of markets and economy, they help pick favorable investment opportunities.
  • Diversification: Since funds invest in number of securities risk is diversified.
  • Flexibility: Investors can benefit from the convenience and flexibility offered by mutual funds to invest in wide range of schemes.
  • Low Transaction Cost: Due to economies of scale, mutual funds pay lower transaction costs. The benefits are passed to mutual fund investors, which may not be enjoyed by an individual who enters the market directly.
  • Regulations: All the mutual funds are registered with SEBI and complete transparency is enforced.
  • Easy to track: Mutual funds provide a clear statements of all investments which makes it easy for investors to keep a tab on.

 

Can I Invest Lump sum amount in mutual funds?

Yes you can invest

What is Systematic Investment Plan & How does it Work ?

Systematic Investment Plan (SIP) which is a systematic method of investing your money. In other words SIP is a planned approach towards investments and it helps you to develop the habit of saving and building wealth for the future. Best part is you can participate in SIP by investing minimum of Rs.500/- or more either on monthly or quarterly basis.

SIP is flexible and easy investment plan & conceptually similar to a recurring deposit where by a fixed investment is made on a regular basis. Your money is auto debited from your bank account and invested into a specific mutual fund scheme. You are allocated certain number of units based on the ongoing market rate called NAV for the day. Every time you invest money, additional units of the scheme are purchased at the market rate and added to your account. Whenever you make an investment in a mutual fund scheme, the fund house has to send you an account statement providing details of holding.

Can I do additional purchase or increase amount of SIP?

Yes. You can do additional purchase and increase your SIP amount also in the same folio or scheme.

Is there any lock in period?

Only ELSS mutual funds (Tax Savings) have 3 years lock in period. Other mutual funds don’t have any lock in period but if you redeem your mutual fund before 1 year there is 1 % exit load.

What are investments options available in Mutual Funds?

Growth

Dividend is not paid out under a Growth Plan and the investor realizes only the capital appreciation on the investments (By increase NAV)

Dividend Payout Option

Dividends are paid out to investors under this option. However, the NAV of the mutual fund scheme falls to the extent of the divined payout.

Dividend Reinvestment Plan

Under this option dividend accrued on mutual funds is automatically re-invested in purchasing additional units.

How much returns can I expect from my mutual funds?

The returns are not fix because as you invest, units are allocated as per on going market rate called NAV & it fluctuates depending on the time of investment, economy’s condition and other factors

Returns on investment also depends on types of mutual fund and your investment tenure. Eg. Equity funds gives better return in long term and debt fund gives better return in short term.

What are different types of Mutual Funds?

Equity Funds

The aim of equity funds is to provide capital appreciation over the medium to long term. Such funds invest major part of their corpus in equities. These funds have comparatively high risks. There are different types of equity mutual funds such as Sector Fund, Index Fund, ELSS Fund & Diversified funds.

Debt /Income Funds

The aim of Debt funds is to provide regular and steady income to investors. These funds invest predominantly in high rated fixed income bearing instruments like bonds, debentures, government securities, commercial papers & money market instruments.  Debt funds are less risky compare to Equity mutual funds & best suited for the medium to long term investors who are averse to risk & seek capital preservation.

Liquid /Money Market Mutual Funds

These schemes invest exclusively in safer short term instruments such as treasury bills, certificate of deposit, commercial papers, and government securities, etc. The period of investment could be as short as a day.

Balanced Funds

The aim of balanced funds is to provide both growth & regular income. These funds invest both in equity & debt in the proportion indicated in their offer documents. Such funds are appropriate for investors looking for moderate growth.

Gilt Funds

These funds invest in Central & State Government securities & best suited for medium to long term investors. Since they are Government backed bonds they give a secured return and also ensure safety of the principal amount.

 What are documents to be submitted along with application form?

Every person shall quote his PAN and enclosed KYC acknowledgement letter issued by the KYC Registration Agency for all investments irrespective of amount involved for purchase of units

 

What is know your customer?(KYC)

It is one time exercise while dealing with securities markets – once KYC is done through a SEBI registered intermediary (broker, DP, Mutual Fund, etc. )you need not undergo the same process again when you approach another intermediary .This entitles  In-person Verification (IPV),verification of identity and address, financial status, occupation and such other information as may be prescribed by guidelines , rules & regulations.

You can know your KYC status:

CVL KRA

NSDL KRA

CAMS KRA

NSE KRA (DotEx)

KARVEY KRA

TYPES OF MUTUAL FUNDS

The mutual fund industry of India is continuously evolving.Along the way, several  industry bodies are also investing towards investors education.Yet very less of our households consider mutual funds as a investment avenue.It is still consider as a high risk option.In fact basic inquiry about the type of mutual funds revels that these are perhaps most flexible, comprehensive and hassle free modes of investments that can accommodate various types of investor needs.

There are wide variety of Mutual Funds schemes that cater to your needs, whatever your age,financial position,risk tolerance and return expectations, Mutual Funds give you the option to invest your money across various asset classes like equity, debt and gold.This allows you to diversify your investments and reduce your portfolio risk.With so many options available in the market, however, it can be confusing to select type of mutual fund as per your financial goal.Here’s look at the some of types of Mutual Funds

1. Types of Mutual Funds on the based on Structure                                                                      1.Open Ended Funds : Open Ended funds are preferred for their liquidity because these funds are  open to purchases and redemption at any time.They do not have a fixed maturity date.Open ended funds are not generally listed on any exchange.Ongoing transactions are based on the net asset value (NAV) of the fund.Hence, unit capital of open ended funds can fluctuate on daily basis.

2.Close Ended Funds : Closed end funds operate for a specific period of time.On specified maturity date, all units are redeemed and scheme comes to a close.It means these schemes have fixed maturity period.To provide a liquidity, these schemes are compulsorily listed on stock exchange  .Investors may buy and sell the units, at the price prevailing in the stock market.

3.Interval Funds : Interval funds are a variant of closed-end funds.They are primarily closed-ended but become open ended at specific intervals.Subscriptions and redemptions allowed at specific intervals during specified transaction period.Minimum duration of interval period has to be 15 days.No redemption is allowed except during the specified transaction period. This schemes have to be mandatorily listed.

2.Types of Mutual Fund on the basis of underlying asset

A Scheme can be also classified as a growth scheme,income scheme or a balance scheme its asset class.Such  scheme may be open ended or close ended as described  earlier.Such scheme classified  as follows :

Equity/Growth Funds : These scheme normally invest major part of their corpus in equity stocks/shares of companies.Such scheme are consider high risk of funds but also tend to provide high return.The aim of these scheme is to provide capital appreciation  over medium to long-term.Equity funds can be further categorized  as –

1.Index Funds :Index funds will only invest in those stocks that constitute a particular index.These funds replicate the portfolio of particular index such as BSE,NSE S&P NSE 50 etc.NAV of such funds would rise or fall in accordance  with rise and fall in index.This would vary as compared to benchmark owing to factor known as a tracking error.

2.Tax Saving/ELSS Funds : These funds offer tax rebate to investor under tax laws prescribe from time to time.Such funds are growth oriented and invest predominately in equities. There is 3 years lock in period in these mutual funds & best suited for long investors  seeking tax rebate and looking for a long term goal.

3.Sector Funds: Sector funds are invest in specific sector like banking, pharma, IT , infrastructure ,etc .or segments of capital like large cap, mid cap,small cap,etc.While these funds may give higher returns,they are more risky compare to diversified funds.Investors need to keep a watch on these funds, much exit on an appropriate time.

Debt/Income Funds : These scheme invest in fixed income securities like a corporate bonds,debentures,government securities, commercial papers and other money market instruments.These funds are less risky compare to equity mutual funds.Such funds are not affected due to fluctuations in equity market.The NAV of the such schemes are affected because of change in interest rate in country.Capital appreciation in such scheme may be limited.The aim of this fund is to provide regular and steady income to investor.Debt Funds can be further categorized as –

1.Liquid/Money Market Fund :These scheme generality invest exclusively safer short term instruments such as treasury bill  ,commercial papers and certificate of deposits.Aim of liquid fund is to enable high liquidity and reasonable return.These funds provide relatively higher safety of principal and liquidity, but the return is also very low.Such funds are appropriate for corporate and individual investors as a mean to park their surplus funds for short periods.

2.Glit Fund :These funds  invest exclusivity in government securities.Government securities have no default risk.NAV of these funds also fluctuate due to change in interest rate and other economic factors as is the scheme with income/debt oriented schemes.

3.Fixed Maturities Plan (FMP) :FMPs, are closed-end debt funds that invest in debt instruments with maturities that match the tenor of the scheme..These have fixed tenure like fixed deposits, though no return is promised or gardened. Securities are redeemed on maturity and proceeds paid to investor.FMPs have to be compulsorily listed on recognized stock exchange.

4.Capital Protection :These are close ended scheme, typically club debt securities with a derivative instrument or equity shares.The primary  objective of this scheme is to safeguard the principal amount while trying to deliver reasonable returns.A large portion of the principal amount is invested in debt instruments.

 

3.Balance Funds :  These are funds that invest in mix of asset classes.In some cases proportion of  equity is higher than debt while in others vice a versa .The aim of balance fund is to provide both growth and regular income.NAV of such funds are likely to be less volatile compared to pure equity fund.These are appropriate for investors looking for moderate growth.

Other Funds :

Exchange Traded Funds (ETF) :ETF is a fund whoes units are trade like stock on the stock exchange.These can brought and sold only in stock market at real time prices which could be different from its unit NAV.You would need demat account to invest in this fund.

Gold ETF : Gold ETFs are exchange traded funds that are mean to track closely the price of physical gold. .Each unit of Gold ETF  lets the investor own 1 gram of gold without physically owing it.With these funds, you are not only relieved of hassles of safekeeping your gold but also assured of purity since these fund invest in certified gold bars.You are also spared of the wastage and making charges that you would typically incur when you buy gold from jeweler You can also get option to convert it to physical gold with selected jwellers..

Fund of Funds (FOF) : FOF invests its corpus in other funds.Its portfolio holds other funds of the same funds house, or other fund houses   These funds have two layers of expenses : one for FOF and the other for the schemes in which it invests. Such funds enables the investors to achieve greater diversification through one scheme.

 

 

 

 

BASIC KNOWLEDGE BEFORE SELECTING MUTUAL FUND

Mutual Funds Industry today is one of the most preferred investment options all over the world. Since several mutual fund schemes are available in market it is very difficult for an average investor to select the right mutual fund. There is danger in choosing mutual fund on its past performance or returns & if you make the wrong choice you could lose money or could not achieve your target or purpose for which you have invest in Mutual Fund. So how do you go about selecting the right mutual fund?

  1. Investment objective, Time Horizon: Each fund have its own logic of investment & targeted customers. You should try to match the objectives and investment philosophy of mutual fund, with your investment goal & time horizon. You need to figure out if the mutual fund objectives would cater your investment need. Time Horizon is the length of time until you need to sell your investment. It can be called Short Term, Medium & Long term.
  • Short Term: If you have short tenure, picking a debt fund is a good option. These funds invest in debt securities such as Treasury Bills, Government Securities, Bonds & Debentures where risk is very low
  • Medium Term: For Investor with medium tenure, Balance Fund which have exposure to both debt & equity are a good option. Equity oriented balance funds invest at least 65% in equity fund & rest in debt securities. Debt oriented balance fund invest 65% or more in debt fund, and balance in equity to offer a yield – kicker to debt investor.
  • Long Term : This investor can opt for more exposure to Equity .Equity fund invest primarily in equity & equity related instruments.

Size of the Fund (Asset Under Management) : A large fund has some obvious cost benefits. The most important benefit pass to investor when the fund size grows reduction expense ratio in the fund. A large AUM will allow skillful fund manager to exhibits his expertise effectively. Overall large fund can take better advantage of opportunities.

Top 5 AUM as on 31.12.2014 (Source AMFI)

Sr No.              AMC Name Average AUM                   (In crores)
1 HDFC Mutual Fund 150467.74
2 ICICI   Prudential Mutual fund 136763.11
3 Reliance Mutual Fund 126069.04
4 Birla Sun Life Mutual Fund 107968.20
5 UTI Mutual Fund 87390.13
  1. Mutual Fund Charges & Fees: Mutual fund make their money by charging fees to investor. Its important to know the different type of charges & fees .These fees are classified as exit load & expense ratio. These fees have major say in determining the net return on investment. Mutual fund charge an exit load on investments which are redeem before a stipulated timeframe. Expense Ratio is recurring fees charge by asset management Companies like management fees, operating expenses, marketing expenses & distribution expenses are born by scheme. Lower expenses benefit you for longer term. As the funds grow in larger in size the fixed expense associated with the fund get spread over more investor ,reducing the expenses & leaving more funds for investment.
  2. Fund Manager Experience:- Many investors do not give importance to the fund manager. Fund Manager Plays vary important role in Fund’s performance. There is need to look closely at the fund manager & several of the details that are present so that there is proper picture available for the individual for their specific investments .The fund manager with the help of his team looks at current situation of the economy, analyzes the securities that can be benefit from the current state of economy and invest in securities that conform to the funds objectives .You must judge fund manager based on the time period the fund manager has spent with the fund house ,Co fund managers role , performance of the scheme & his past record .The fund manager with tenure of 3 to 5 years or more is consider ideal for the purpose of selecting fund.
  3. Risk & Return associated with investment:-Risk & Return are an integral part of investment. It is computed by comparing the return of fund after adjusting for the risk assumed. A good mutual fund is one who gives better return than others for the same kind of risk taken. Popular methods of measuring Risk adjusted returns are Sharpe Ratio, Treynor Ratio. Also check Standard Deviation, Alpha & Beta of the fund
  • Sharpe Ratio :-Sharpe Ration is a simple one number representation .It indicates return per unit of risk. Therefore higher the ratio, better the fund.
  • Treynor Ratio:- It is very similar to Sharpe Ratio. It indicates excess return over the risk free rate to additional risk taken .Higher the ratio better the performance of the fund.
  • Standard Deviation:-It measures volatility of the returns from mutual fund scheme over a particular period .Higher the standard deviation of returns higher the risk. Hence while comparing the performance of the two funds ,you should opted for the one with lower standard deviation ,which would indicate the fund will not experience extreme highs & lows and its value will continue to grow gradually.
  • Alpha:-It tells us what extra or less the fund manager has generated out of given portfolio in comparison to benchmark. In other words it is the performance ranking of the fund manager.
  • Beta:- It tells you how much a fund’s performance would swing compared to benchmark. It is typically measured by assuming that the market portfolio, as represented by an index, will have a beta of 1.Stocks with a beta lower than 1 is tend to be less volatile than the index & vice-verse.
  • R-Squared:- It is the statistical measure which indicates how is the movement of the fund in the line with the index. High R-Squared means it is highly matching with the Index performance which it is following.

The above mentioned few points are basic things you need to check before investing. You can get all this information related to scheme on the website of the fund. Also find these details, comparison on the website of mutual fund tracker such as Value Research, Money Control, Indian Mutual Fund, etc.

Disclaimer:- The opinion expressed in article are personal opinion of author. This platform is used to spread the knowledge about Personal Financial Planning.