Make money systematically
One common route that several investors have adopted is that of the systematic transfer plan (STP) where an amount is shifted each month from one scheme (usually liquid or short-term or floating rate) to some other scheme (usually equity-oriented).
Most people select a specific sum to be transferred when they go in for a STP. Not everyone might be comfortable with this situation or there might be cases where someone might want to make a STP from an equity scheme to a debt scheme for the gains accrued. In such a situation, there is another option that some funds offer investors, which can be used quite effectively.
The second option is the use of an STP where only the appreciation in a scheme is transferred out of the fund. Before deciding upon either of the routes, investors must take a look as to whether their fund allows them the option of taking away just the gains and not just a specified sum. Here’s how the option stacks up.
In a case where a specified sum is transferred each month, then the investor would witness a situation where, say, Rs 50,000 is invested in a particular scheme at a net asset value (NAV) of Rs 10 and then, there is a systematic transfer plan of around Rs 2,000 per month. In such a situation, what happens is that units equivalent to a sum of Rs 2,000 is redeemed each month, irrespective of the movement of the NAV and then, the amount is invested in another scheme at the applicable NAV.
Most people select a specific sum to be transferred when they go in for a STP. Not everyone might be comfortable with this situation or there might be cases where someone might want to make a STP from an equity scheme to a debt scheme for the gains accrued. In such a situation, there is another option that some funds offer investors, which can be used quite effectively.
The second option is the use of an STP where only the appreciation in a scheme is transferred out of the fund. Before deciding upon either of the routes, investors must take a look as to whether their fund allows them the option of taking away just the gains and not just a specified sum. Here’s how the option stacks up.
In a case where a specified sum is transferred each month, then the investor would witness a situation where, say, Rs 50,000 is invested in a particular scheme at a net asset value (NAV) of Rs 10 and then, there is a systematic transfer plan of around Rs 2,000 per month. In such a situation, what happens is that units equivalent to a sum of Rs 2,000 is redeemed each month, irrespective of the movement of the NAV and then, the amount is invested in another scheme at the applicable NAV.
On the other hand, where there is a rise in the NAV of the scheme but this keeps varying each month, then an investor might like to ensure that only the gains from the scheme are transferred to some other scheme, while the initial amount invested remains the same. In implementing this, there are several questions that will confront the investors.
The first thing is that the amount transferred out each month will not be the same. This will be because it is highly unlikely that any scheme, especially an equity scheme, will give returns that are the same each month. There will be a large variability in the returns for the investors and they would have to live with that kind of variability as far as the transfer is concerned.
What’s interesting is that there could be various months where there is no appreciation or gain in the units and in such a situation, there will be no transfer of units during that month. Another thing that investors will witness is that the appreciation each month has to be on a month-on-month basis and not the cost of the original investment.
Thus, even a month-on-month drop will ensure that the transfer does not take place. Consider the entire case with the help of an example.
The first thing is that the amount transferred out each month will not be the same. This will be because it is highly unlikely that any scheme, especially an equity scheme, will give returns that are the same each month. There will be a large variability in the returns for the investors and they would have to live with that kind of variability as far as the transfer is concerned.
What’s interesting is that there could be various months where there is no appreciation or gain in the units and in such a situation, there will be no transfer of units during that month. Another thing that investors will witness is that the appreciation each month has to be on a month-on-month basis and not the cost of the original investment.
Thus, even a month-on-month drop will ensure that the transfer does not take place. Consider the entire case with the help of an example.
An investor buys 5,000 units of a fund at Rs 10 per unit. This means an investment of Rs 50,000. Assume that at the end of the first month, the NAV of the unit comes to Rs 11. In this case, the value of the fund becomes Rs 55,000. In this case where only the appreciation has to be transferred the additional Rs 5,000 will be transferred to some other fund.
At the end of the second month the NAV of the fund becomes Rs 11.5. This month only a sum of Rs 2,273 will be transferred out of the fund to the other scheme because that is the gain over the initial investment amount of Rs 50,000. Note that the units will vary after each sale because the number of units will reduce and this is leading to the change in the actual value of the units being redeemed.
After the third month if the NAV of the scheme is Rs 12.5 then the transfer this month will be Rs 4,347 because this is value in the account over the initial investment sum. This is calculated as the gain of a rupee in the investment multiplied by the number of units, which leads to the final figure for the investor.
Now if in the next month the value of the units actually falls to Rs 12 then there is a fall in the value of the holdings. Look carefully and see that the loss is from the previous month and not the initial investment.
At the end of the second month the NAV of the fund becomes Rs 11.5. This month only a sum of Rs 2,273 will be transferred out of the fund to the other scheme because that is the gain over the initial investment amount of Rs 50,000. Note that the units will vary after each sale because the number of units will reduce and this is leading to the change in the actual value of the units being redeemed.
After the third month if the NAV of the scheme is Rs 12.5 then the transfer this month will be Rs 4,347 because this is value in the account over the initial investment sum. This is calculated as the gain of a rupee in the investment multiplied by the number of units, which leads to the final figure for the investor.
Now if in the next month the value of the units actually falls to Rs 12 then there is a fall in the value of the holdings. Look carefully and see that the loss is from the previous month and not the initial investment.
One has to consider the previous month because last month when the units were valued at the original cost this was done based on the closing NAV of the month and it is this NAV that has to be seen for the loss or gain for the investor in that particular month and not the original cost.
In this month since there is no gain there will not be any transfer for the investor because the basic condition is not getting fulfilled.
Further often some funds have the condition that they will not transfer a sum below a certain amount that could be say Rs 1,000 or Rs 2,000 and this should also be considered while making the investment and planning for the withdrawal.More on..................... http://freesticky.bravehost.com
In this month since there is no gain there will not be any transfer for the investor because the basic condition is not getting fulfilled.
Further often some funds have the condition that they will not transfer a sum below a certain amount that could be say Rs 1,000 or Rs 2,000 and this should also be considered while making the investment and planning for the withdrawal.More on..................... http://freesticky.bravehost.com
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