Could ICICI Prudential MF's investment varying facility make your equity funds more profitable?

ICICI Prudential mutual fund has re-imagined the plain-vanilla systematic transfer plan (STP). The facility allows you to invest more in equity funds when market valuations are attractive and reduce allocations during sharp rallies and peaks. The new variant is called Booster STP. Here’s what you need to know about booster STP.

Invest more when markets are down

If you have Rs 5 lakh, you could invest it in one go in an equity fund. But what if equity markets fall subsequently? Your scheme’s net asset value (NAV) will also decline. Is there an alternative to work around this problem?

You could opt for the STP facility. Invest the lumpsum in a liquid fund first. Later, the STP facility transfers an amount from your liquid fund to your equity fund, periodically. So, you stagger your investments.

How is the Booster STP different?

What happens if markets falls sharply and you wish you had invested more? That’s when the booster STP helps. If ICICI Prudential AMC considers the markets to be undervalued, it would increase your monthly contribution. On the other hand, if it is of the opinion that markets are overvalued, then it would even reduce your monthly instalment.

Is the STP the same as an SIP?

The basic principles of SIP and STP are the same. You don’t invest everything in a MF, especially in an equity fund when markets are volatile, at one-go. It’s best to stagger your investments. Now, an SIP works best if you want to invest a part of your regular income into MFs. But what if you already have a lumpsum in your hands?

You can invest the lumpsum in a savings bank account and start an SIP. But savings bank accounts give low interest rates. A better alternative is to deploy the entire lumpsum amount in a low-risk liquid fund and later initiate a transfer. This transfer is called a STP.

There are variants such as Flex STP and Swing STP. How different is Booster STP from these STPs?

Typically, a Flex STP also changes the STP instalment amounts. A Flex STP takes into account your monthly instalment and your investment value at the end of every month. If your investment value is less, which means that equity markets may have fallen, it would invest more in the following month. But if the markets have risen, then it would invest at least the base amount.

ICICI Prudential’s Booster STP will invest 0.1 times to five times the base amount. In other words, your investment amount can go up or down based on the market valuations.  All you need to do is mention the base investment amount and the frequency with which you’d like to transfer; weekly, monthly or quarterly.

There are some other STPs- such as Kotak mutual fund’s Flex STP- that looks at Nifty index’s price-to-equity ratio. If Nifty 50’s P/E is greater than 15, then the pre-determined instalment amount gets invested. But if P/E falls below 15 times, then three times the base amount gets transferred.

ICICI Prudential mutual fund looks at P/E Ratio, Price-to-Book ratio, government security yield and market capitalisation to gross domestic product ratios. This is how, the fund house says, it’ll determine if markets are cheap or expensive. And decide your STP amount accordingly.

Choosing between simple and booster STP

Over the years, fund houses have devised ways to maximise SIPs and STPs, by tweaking them. Booster STP does add value to your portfolio, but new investors might find it complicated.

Rushabh Desai, an AMFI-registered mutual fund distributor says in times when markets go up or down wildly, it’s best for the investors to sit with her advisor and figure out how she wants to go ahead. Market fluctuations are a bit hard to digest for many investors and it needs hand holding, instead of automatically increasing or reducing the investment amount.

Parul Maheshwari, a certified financial planner, agrees. She fears that it could get difficult to explain investors why in a sudden month, especially if markets falls dramatically, their investment amounts have suddenly shot up. Registered investment advisors like Gurugram-based Ashish Chaddha alters the STP tenures of his client, himself, instead of relying on fund houses’ designed STPs. He says typically he recommends an STP to get done within 6-12 months. “These days, going by the high market levels, I advise an STP to stretch for 12-18 months,” he says.

Maheshwari says that it’s better to invest in a Balanced Advantage Fund that toggles between equity and debt, depending on market valuations. But Chintan Haria, Head – Product Development & Strategy at ICICI Prudential MF says that a BAF type of a fund, in current markets, would only offer around 30-50 percent equities. For those investors who wish to invest in an equity fund, a Booster STP helps.