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Given a choice would you want to deploy more when market valuations are cheaper and less when it is expensive?
Common wisdom it is to avoid lumpsum investment when markets are trading near all-time highs. Then how to deploy your lumpsum money? You would probably go for systemic transfer plan from a debt mutual fund to an equity mutual fund. The challenge here is the amount and the tenure will remain fixed. Given a choice would you want to deploy more when market valuations are cheaper and less when it is expensive?
If the answer is yes, then you have a solution. ICICI Prudential AMC has launched industry’s first innovation in systemic transfer plan (STP). Called booster STP, it will ensure that variable amount is invested from the source scheme to the target scheme at defined intervals which could be weekly, monthly and quarterly.
Note that the source and target schemes have to be from the ICICI Prudential AMC. All an investor has to do is provide a base installment amount that is intended to be transferred to the target scheme. The final investment amount could be 0.1 to five times (multiplier) the base amount based on the interval selected and the market valuations. For example, on a base installment of Rs 10,000, the investment amount can be from Rs 1,000 to Rs. 50,000.
The fund house has its in-house equity valuation index – which is published every month – to track the market valuations and hence the multiplier.
“Booster STP offers a unique solution to those investors who are having lump-sum money to invest however are faced with dilemma with respect to market valuations (whether they are attractive or expensive) and how much they should invest and for what tenure. The Booster STP allows an investor to invest more in equity funds when market valuations are attractive and reduces allocation during market peaks,” explains Chintan Haria, Head Product & Strategy, ICICI Prudential AMC.
How will it work?
If you have Rs 12 lakh lumpsum to invest and you choose an average tenure of 16 months on a base amount of Rs 10,000, the eventual tenure could be as high as 38 months when markets are expensive and as low as three months when markets are cheaper. The investment amount would vary in the range of Rs 1,000 to Rs 50,000. The back-tested data from ICICI Pru AMC shows Rs 12 lakh invested in source scheme on Nov 2008 deployed in the target scheme within three subsequent months due to cheap valuation would have turned into Rs 69,37,036 by July 2021, a CAGR of 14.9%.
Similarly, Rs 12 lakh invested in source scheme on Nov 2010 deployed in equity markets within 14 subsequent months would have turned into Rs 38,78,163 by July 2021, a CAGR of 11.5%.
The ICICI Pru AMC shares comparable data too. If you had invested Rs 12 lakh in source scheme in January 2019 and set up a booster STP in Nifty 50 Index, the value of investment as on June 2021 will have been Rs 21,56,355, a compound average growth rate (CAGR) of 26.4%.
The same amount invested in Nifty50 index via a normal STP (Rs 1 lakh monthly instalment for 12 months) will have return Rs 17,34,527, a CAGR of just 15.9% by June 2021.
While the booster STP captures market volatility, it can be counterproductive if the market conditions remain bearish over a long period of time, says Anurag Garg, CEO & Co-founder Nivesh.com. “This is because the investor will keep making very high investments, which may not be in sync with his overall investment profile. Also, it will not be very useful if the time horizon is short, say less than 6 months.”