Swing STP works on the concept of value cost averaging.
HDFC Mutual Fund is starting a new Swing STP through which investors can switch a fixed amount from debt fund to equity scheme (growth option) in order to achieve a fixed target value of investment. Investors will have to invest a lump sum of minimum Rs. 12,000 in any of the debt funds. This facility is available in 23 HDFC funds.
HDFC’s Swing STP works on the concept of value cost averaging (VCA) which differs from rupee cost averaging. In rupee cost averaging, investors are buying a fixed sum every month, for example Rs. 1,000 in a mutual fund irrespective of the market movement. On the other hand in value cost averaging, investors get to buy more when the market falls and less when market goes up thereby booking some profits.
For instance, Ram wants to invest a sum of Rs. 12,000 in HDFC Growth Fund. Firstly, he has to invest Rs. 12,000 in any of the debt funds, say HDFC Liquid Fund, at one go. On January 1, 2012 (first installment), Rs. 1,000 will be switched into HDFC Growth Fund at an NAV of Rs. 10. Suppose the NAV of the scheme shoots up to Rs. 12 on February 1, thus the market value of his investment will go up to Rs. 1,200, and only Rs. 800 will be switched into HDFC Growth Fund on February 1.
One unique aspect of this facility is if Ram’s market value of investments in March goes up to Rs. 3,500 prior to the transfer, Rs. 500 will be transferred back (reverse transfer) to HDFC Liquid Fund instead of switching Rs. 500 into HDFC Growth Fund. If Ram’s market value decreases to Rs. 2,500 in March, then Rs. 1,500 will be transferred from HDFC Liquid Fund to achieve the target value of Rs. 4,000 in April.
The total amount invested by Ram through Swing STP could be more than the total target market value if the NAV falls. One flipside of value cost averaging is that if Ram’s target market value of investment falls to Rs. 8,667 in the month of November at NAV of 13 (11th installment), then Ram will have to pump in Rs. 2,333 to achieve the target value of Rs. 11,000. Thus deciding the amount of investment and investor's ability to pump in money becomes crucial.
Let’s consider that the fund’s NAV goes up to 15 in November and the market value of investments is Rs. 10,714, then only Rs. 286 will be switched from HDFC Liquid Fund to HDFC Growth Fund taking the target value to Rs 11,000. VCA can work wonders in a bull phase.
In case if the amount to be transferred is falling short, then the residual balance will be transferred and the Swing STP will be closed. Exit loads will be applicable on all switches and reverse switches. The market value of investments could be higher or lower than the target value depending on the scheme’s performance.
