Updated: August 22, 2021 12:45:10 pm
The Sensex and the Nifty are trading at all-time highs, and there is still enthusiasm among retail investors about participating in equity markets. But the free ride may be over, and everything that one invests may not rise. In fact, August has seen a clear divergence in performance across various indices. While the benchmark Sensex has risen 5.8% in August to trade at over 55,500, the mid-cap index has risen just 0.1% and the small cap index is down 2%. Investors moving from mid- and small-caps to blue chip companies amid high valuations is an indication of caution in the market, and is a signal for retail investors to follow a proper strategy. As investors weigh their options between waiting for a correction and missing out on a possible rally, experts say they would do well to follow a strategy of a systematic transfer plan instead of a lump-sum investment, and go for large-cap funds or funds in the diversified or hybrid category.
What should an investor consider?
Both fund managers and investment advisers see the current market situation as a tricky one: While there is concern over valuation, there is also a possibility of a further rise in markets in the wake of the ongoing high liquidity and hopes of an uptick in economic activity. So, while valuations may not look very attractive, there is no major foreseeable reason for a correction either. Besides, corporate earnings too have been supportive. While risks exist in the form of the US Federal Reserve announcing a tapering-off of its monetary stimulus programme, along with the probability of a third wave of the pandemic, market experts say that most of these are known factors and largely factored into the price.
The US Fed is set to meet for its annual August policy retreat later this month. Through its stimulus, it is currently buying bonds worth $120 billion each month.
So, while investors can continue with their existing investments, they would be wise to not put lump-sum investments and can instead opt for arrangements such as a systematic transfer plan (STP).
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Where should you invest?
While the market rally is driven more by liquidity, and it is getting more and more expensive with every rise, an unexpected hiccup can lead to a correction and may first impact the companies in the mid- and small-caps segment.
Experts say that in this uncomfortable zone in terms of valuation and the fear of losing out on a rally, it is time to get into large caps funds or companies. While they provide better protection in times of correction, investors can also look at companies that have significant businesses focused outside India.
“One must avoid small-caps and even mid-caps at this time. Investors should either go for large-caps, flexi-caps or hybrid funds and the better way to do is through STPs instead of investing lump-sum amount,” said Surya Bhatia, founder, AM Unicorm Professional.
How does an STP work?
An STP allows an investor to give consent to a mutual fund to periodically transfer a certain amount from one scheme to another at fixed intervals. This facility allows deployment of funds in a staggered manner and helps the investor take advantage of a correction in the market.
For example: If an investor wishes to deploy Rs 10 lakh into equities, instead of investing it all together at one go, he/she can invest a lump-sum of Rs 10 lakh in a debt mutual fund and thereafter set up an STP of a certain amount in an equity fund.
The investor needs to select a fund from which the transfer should take place and a fund to which it is taking place. Transfers can be made weekly, monthly or quarterly depending upon the STP chosen and the options available with the asset management company.
In a volatile situation while an STP provides protection to the part of the investment that remains parked in a debt fund, it also helps investors average out the cost of investment.
“A conservative investor can go for a 12-24-month STP where the fund can be diverted from debt to equity funds — large-cap, flexi-cap or hybrid funds. One can do a weekly STP where Rs 1 lakh can be put in a debt fund and it can get invested into equity scheme over 50 weekly instalments. It provides a good rupee averaging,” said Bhatia.
What are the various types of STPs?
Apart from the plain vanilla STPs, mutual fund houses offer innovative variants such as Flex STP, formula-based STP and booster STP. Under Flex STP, an investor can park money in a debt fund which is then transferred to an equity fund based on the P/E (Price to Earnings) band of the Nifty 50 Index. In case of formula-based STP, as the name suggests, the STP amount is decided based on a formula. There are several fund houses that offer either of these variants of STPs.
Booster STP is a newer option, recently introduced by ICICI Prudential Mutual Fund. This allows an investor to invest variable sums into equity funds based on market valuation. While the investor is required to provide a base instalment amount (amount intended to be transferred) and the frequency of transfer — which can be weekly, monthly or quarterly — booster STP gives the flexibility to the fund house to vary the instalment amount from 0.1× to 5× the base amount, and that is based on the fund house’s equity valuation index. This means that when market valuations are very expensive, the STP instalment amount would go down to 0.1×, and when the valuations are attractive, they can go up to 5×. So on a base instalment of Rs 10,000, the investment amount can vary between Rs 1,000 and Rs 50,000.
So, compared to a traditional STP, in a booster STP the instalment amount and the periodicity of transfer is variable and is decided by the fund house in line with investment opportunity it sees.