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WHY STP IN MID CAP FUNDS MAKE SENSE IN THE CURRENT SCENARIO


STP is Systematic Transfer Plan which is a wonderful mode of investing in stock markets without being fully invested in equities. Particularly in today’s market trend when the biggest event in India – the Lok Sabha elections are due in less than 10 months the markets may remain highly volatile, uncertain and any adverse results (of the election) may lead to a carnage or crash because more than fundamentals sentiments is what moves the market.

In the last few months mid and small cap stocks have taken the maximum beating with almost every stock in this space fallen to new lows. From 17000 levels as on 1st Feb 2018 to 15000 levels as on 16th July 2017 the BSE Mid Cap index has fallen quite badly. BSE Small Cap index’s fall has been even worse; from 18700 to 15600 during the same period. Interestingly, Sensex has risen from 35900 levels to 37000 levels between Feb and July 2018 confusing common investors further on how to understand and analyse the market performance.Most of the investors in the mid & small cap mutual funds have been feeling bitter about the performance of their investments which is quite natural but it is also obvious that such anomalies are common in the investing journey of every investor.

But how to take advantage of this situation in the mid and small cap space? The opportunity is in choosing the Systematic Transfer Plan or STP route of investing in mid & small cap mutual funds.

Let’s now see how it works:

Step 1:
Choose mutual fund houses: let’s say you choose these fund houses - Aditya Birla Sun Life, DSP Blackrock, Franklin Templeton, HDFC, ICICI Prudential and Reliance Mutual Fund (the top fund houses in India)

Step 2:
Choose a suitable debt fund from these aforementioned mutual fund houses; preferably choose Short Term Debt Fund or Medium Term Debt Fund that has average maturity and Macaulay Duration of about 2 years (this information can be found in the respective fund factsheets) and invest a predetermined amount, let’s Rs.1.00 lakh.

Step 3:
Give an instruction to the chosen fund house and the chosen scheme to transfer an amount of Rs.5000 every month on a specific date (let’s say on 10th of every month) into a Mid Cap fund

Example:

  • Fund house chosen: HDFC Mutual Fund
  • Debt scheme chosen to invest the full amount: HDFC Short Term Debt Fund
  • Average Maturity: 1.40 years (as per June 2018 fund factsheet)
  • Macaulay Duration: 1.31 years(as per June 2018 fund factsheet)
  • Amount to be invested: Rs.1.00 lakh
  • Equity scheme chosen: HDFC Mid Cap Opportunities Fund
  • Monthly amount to be transferred from Debt to Equity scheme: Rs.5000
  • Date of transfer chosen: 10thof every month
  • Number of months to be transferred: 20 months (Rs.5000 x 20 months = Rs.1.00 lakh)
  • Over the next 20 months starting from 10th August 2018 Rs.5000 will get transferred from debt to equity systematically; while the amount in debt scheme will continue to earn returns in the range of 7% to 8% p.a. (based on the YTM of short term debt funds), the money invested in equity (mid cap scheme) will seek to achieve higher returns based on the performance of the mid cap stocks (as per the fund philosophy).

    The method is ideal for those who want to invest in the mid cap space but is not sure if it is right to be fully invested at the current levels.

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