HDFC India has introduced Swing Systematic Transfer Plan (STP) from
February 21, 2012. The concept of Swing STP works on the principle of
Value Cost Averaging (VCA) and not on Rupee Cost Averaging (RCA) (to
know the difference between VCA and RCA refer to the following http://vcavsrca.blogspot.in/).
Since Swing STP is based on the concept of the VCA, the scheme invests more when the NAVs are low and less when the NAVs are high or draw the excess when the portfolio value is more than the targeted investment value.
Let's explain the Swing STP principle through the following example.
Person X has a target to invest Rs 48000/- in HDFC Top 200 - Growth option over a period of 12 months. So first person X has to make a lumpsum investment of Rs 48000/- in any of the debt funds from HDFC, say HDFC Liquid Fund and give instruction to transfer Rs 4000/- from debt fund to HDFC Growth fund on a monthly basis on the 1st of every month.
Assuming the NAV of the HDFC Top 200 fund is at Rs 10 per unit, on 1st Jan the first installment of Rs 4000/- will be trasnferred into HDFC Top 200 - Growth fund i.e. 4000/10 = 400 units of HDFC Top 200 will be purchased.
Suppose on 1st Feb the NAV of HDFC Top 200 Growth scheme goes up to Rs 12/- then the Swing STP scheme will compare the total market value of the portfolio which now stands to be at Rs 4800/-, however the target value of the portfolio as per instructed by Person X should be increased by Rs 4000/-, which means in the month of February the Swing STP option will take the difference of market value of the portfolio which is Rs 4800/- and target value i.e Rs 8000/- and invest the difference Rs 3200/- to purchase the units of HDFC Top 200 Growth fund. This means in the month of February the Swing STP scheme will purchase 3200/12 i.e. 267 units of HDFC Top 200 scheme.
Now by 1st Mar the NAV of HDFC Top 200 Growth fund stands at Rs 8/- and hence the market value of the portfolio stands at Rs 5336 i.e. ((400 + 267) units * 8), however the target value should be Rs 12000/- in which case Swing STP will take the difference of the market value of the portfolio i.e. Rs 5336 and the expected target value i.e. Rs 12000/- and invest the difference amount (Rs 6664) to purchase the units of HDFC top 200 Growth fund i.e in the month of march 6664/8 i.e. 833 units will be purchased. So the total units that Person X holds at the end of March is (400+267+833) i.e 1500 units.
In case, on 1st April, if the market value of the portfolio increases to Rs 17000/- whereas as per Person X the target value should be Rs 16000/-, then as per Swing STP, the additional amount of Rs 1000/- will be transferred back to the debt scheme.
In the above example, the HDFC Liquid Fund is the Transferor scheme whereas HDFC Top 200 Growth fund is the Transferee scheme. Also in the above example if the normal SIP which works on RCA would have been considered then the total MF units purchased would have been 1233 i.e. in Jan 400 units, in Feb 333 and in March 500 units.
At the time of writing the article the concept of Swing STP was introduced by HDFC AMC on 21, Feb, 2012 and is available only for HDFC debt and equity growth funds.
For Swing STP terms and conditions like the minimum amount of investment in debt funds, frequency of transfer, minimum amount to be transferred, Please visit the AMC website.
Since Swing STP is based on the concept of the VCA, the scheme invests more when the NAVs are low and less when the NAVs are high or draw the excess when the portfolio value is more than the targeted investment value.
How To Get Started...
- To start a Swing STP, one needs to first decide on the amount by which the portfolio value should appreciate at the end of each periodic interval which is predetermined by the investor, say monthly.
- Then open an account in any one of the Debt schemes which is also referred to as "Transferor" scheme. Once the Transferor scheme is decided then give instruction to transfer an amount to the Growth option of an Equity scheme at regular intervals. The Equity scheme is also referred to as a "Transferee" scheme. That's it. Now on the Swing STP date, the scheme will decide on the allocation of units as per the VCA principle.
Illustration
Let's explain the Swing STP principle through the following example.
Person X has a target to invest Rs 48000/- in HDFC Top 200 - Growth option over a period of 12 months. So first person X has to make a lumpsum investment of Rs 48000/- in any of the debt funds from HDFC, say HDFC Liquid Fund and give instruction to transfer Rs 4000/- from debt fund to HDFC Growth fund on a monthly basis on the 1st of every month.
Assuming the NAV of the HDFC Top 200 fund is at Rs 10 per unit, on 1st Jan the first installment of Rs 4000/- will be trasnferred into HDFC Top 200 - Growth fund i.e. 4000/10 = 400 units of HDFC Top 200 will be purchased.
Suppose on 1st Feb the NAV of HDFC Top 200 Growth scheme goes up to Rs 12/- then the Swing STP scheme will compare the total market value of the portfolio which now stands to be at Rs 4800/-, however the target value of the portfolio as per instructed by Person X should be increased by Rs 4000/-, which means in the month of February the Swing STP option will take the difference of market value of the portfolio which is Rs 4800/- and target value i.e Rs 8000/- and invest the difference Rs 3200/- to purchase the units of HDFC Top 200 Growth fund. This means in the month of February the Swing STP scheme will purchase 3200/12 i.e. 267 units of HDFC Top 200 scheme.
Now by 1st Mar the NAV of HDFC Top 200 Growth fund stands at Rs 8/- and hence the market value of the portfolio stands at Rs 5336 i.e. ((400 + 267) units * 8), however the target value should be Rs 12000/- in which case Swing STP will take the difference of the market value of the portfolio i.e. Rs 5336 and the expected target value i.e. Rs 12000/- and invest the difference amount (Rs 6664) to purchase the units of HDFC top 200 Growth fund i.e in the month of march 6664/8 i.e. 833 units will be purchased. So the total units that Person X holds at the end of March is (400+267+833) i.e 1500 units.
In case, on 1st April, if the market value of the portfolio increases to Rs 17000/- whereas as per Person X the target value should be Rs 16000/-, then as per Swing STP, the additional amount of Rs 1000/- will be transferred back to the debt scheme.
In the above example, the HDFC Liquid Fund is the Transferor scheme whereas HDFC Top 200 Growth fund is the Transferee scheme. Also in the above example if the normal SIP which works on RCA would have been considered then the total MF units purchased would have been 1233 i.e. in Jan 400 units, in Feb 333 and in March 500 units.
Benefits of Swing STP
- No need to time your entry or exit, the scheme takes care of it as it buys more when NAVs are less and less when NAVs are more.
- Initial investments in debt / liquid funds enhance total returns
- Swing STP even allows reverse transfer of funds i.e. from Transferee scheme to Transferor scheme, if the market value of the portfolio is greater than the target value.
- If we compare RCA and VCA then the return percentage in VCA will be higher than RCA.
At the time of writing the article the concept of Swing STP was introduced by HDFC AMC on 21, Feb, 2012 and is available only for HDFC debt and equity growth funds.
For Swing STP terms and conditions like the minimum amount of investment in debt funds, frequency of transfer, minimum amount to be transferred, Please visit the AMC website.
