The Hindu Business Line : Mutual fund investing on auto-pilot mode

YOU have done your homework, mulled over numbers and invested your savings into the best mutual funds you could identify. If you thought that was all you needed to do to get the best out of your investments, you are quite wrong. You need to check on your portfolio at least twice a year, keep track of the returns and dividend payouts, and periodically shift money from one type of fund to another.

Does that sound like drudgery? Fund houses are now offering a slew of value-added services that allow you to put your investment routine on auto-pilot.

Systematic Investment Plans (SIPs) allow you to invest in a fund by way of monthly instalments. Now, fund houses are offering a host of other facilities that allow booking of profits on fund investments, shifting money from one fund to another and even re-investing dividends, based on the instructions you leave with the fund.

Systematic Withdrawal Plans

Systematic Withdrawal Plans (SWPs) allow the investor to withdraw money from a debt or an equity fund in equal instalments at periodic intervals. Just like a systematic investment, a systematic withdrawal plan reduces the impact of timing when you liquidate your investments in a fund. Each instalment is generated by redeeming the necessary number of units from the investment. An SWP allows you to choose the quantum and periodicity of withdrawals from the fund. You will need to leave instructions with the fund on the periodicity of withdrawal, a date for each withdrawal and the delivery instructions for the money.

You can use SWPs to set up a stream of monthly or quarterly incomes to see you through monthly expenses. Or you can use them to book profits periodically on investment to lock into a period of high returns from the equity or debt markets. The SWP could be a good alternative to the dividend option of a mutual fund, because payouts can be timed to your convenience, instead of having to wait for the fund to declare dividends.

Variations: SWPs are offered both on debt and equity products by most fund houses. Monthly and quarterly withdrawals are usually permitted.

Fund houses such as Franklin Templeton, HDFC Mutual, Birla Sun Life and Kotak Mahindra Mutual offer two sub-options within the SWP — Fixed and Appreciation.

Under the Fixed SWP, the investor can choose to receive a fixed sum, say, Rs 1000 a month, over a specified number of months by way of systematic withdrawals. Under the Appreciation option, you can leave instructions with the fund to redeem units only to the extent of the capital appreciation, if any, earned on the units.

Fund houses have some limitations on how and when you can avail yourself of the SWP facility. Franklin Templeton requires a minimum balance of Rs 25,000 in a fund. Funds may also specify the minimum size of the monthly instalment under the SWP. Templeton sets a minimum instalment of Rs 1,000 for the Fixed SWP, while in Birla Sun Life it is Rs 500.

The rules for the Appreciation option differ from fund to fund. For instance, Birla Sun Life allows withdrawals up to 90 per cent of the appreciation in a particular month or a quarter.

Others allow you to specify a particular amount; withdrawals will be made only if the fund earns capital appreciation over the specified limit.

Trigger options

A few fund houses such as PruICICI Mutual Fund and UTI Mutual Fund offer a Trigger facility that is a variant of the Appreciation SWP. The Trigger facility saves you the bother of having to keep track of your investment;you can leave instructions on booking profits on fund holdings when a specified `trigger' is reached.

For instance, with PruICICI you can choose among four Trigger options.

`Appreciation' Trigger allows you to book profits when a certain NAV level is reached. You can have a `Stop-loss Trigger', by specifying a certain lower NAV level at which the fund is to redeem units on your behalf.

You can also specify a Trigger that will be activated after a certain tenure or on a particular date.

PruICICI also allows use of the option with a switch facility, that enables the investor to switch investments from, say, an equity to a debt fund, when a certain target return is reached.

Systematic Transfer Plans

Suppose you have made big money on equity fund investments over the past year and want to plough the capital gains into safe investment avenues. A Systematic Transfer Plan (STP) could be the answer.

An STP allows you to make periodic transfers from one fund into another managed by the same fund house. As with an SWP, you have to specify the instalment and the periodicity of the transfer.

Fund houses usually offer monthly and quarterly STPs. But a few funds, such as PruICICI, allow systematic transfers even at weekly intervals. The STP can be a useful facility to re-balance your portfolio or to phase out investments in a fund over a period. You can invest a lump sum in a liquid or floating rate fund and leave instructions to transfer Rs 1000 every month into an equity fund.

Or you can transfer a fixed sum every month from a debt to an equity fund. While many fund houses permit STPs from debt to equity funds, only a few allow the reverse.

Franklin Templeton, PruICICI and Birla Sun Life allow systematic transfers out of their debt schemes and into their equity funds, but not the reverse. Kotak Mutual Fund permits two-way STP. Therefore, if you own Kotak products, you can make regular transfers from equity to debt funds, or vice versa. This can be useful for an investor who would like to re-balance his equity investments, and contain them within a desirable limit. STPs, too, offer a choice between a Fixed and an Appreciation option.

A Fixed option STP allows you to sweep a fixed sum at periodic intervals into another fund. The Appreciation STP is activated only when the capital appreciation on your investment crosses a limit you have set.

Dividend Transfer Plan

Offered by Franklin Templeton, the Dividend Transfer Plan allows the investor to sweep all the dividends declared by a debt scheme into the equity or hybrid products it manages.

A useful feature for investors looking to acquire a marginal equity exposure or benefit from an `equity kicker' to their debt returns.

Limitations

Useful as many of these facilities are, the value-adds are not without limitations:

These facilities are useful only when you own two or more products from the same fund house, not when your investments are diversified across fund houses.

Fund houses have a shortlist of specific funds that are eligible for SWPs, STPs and DTPs. You will have to run a check on whether the fund in your investment shortlist offers each facility.

Fund houses may have limitations on the simultaneous use of two add-on features.

For instance, Franklin Templeton disallows the use of SIPs and SWPs at the same time, from a single fund. PruICICI stipulates that the Trigger facility is not available on investments made through the SIP or STP route.

Fund houses usually have specific days in a month, when all STP and SWP requests will be given effect. This is inconvenient if you like to time each transaction.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page