Flex SIP & STP - Making Way For Value Based Investments

Systematic Investment Plan (SIP) outscores other modes of investment when it comes to investing in equities yet they fall short in meeting one of the most important investment principles - 'buy low and sell high'. To counter this drawback, fund houses have rolled out Flexible Systematic Investment (SIPs) Plans and Flexible Transfer Plans (STPs) for some of the schemes.

Then & Now

Under regular SIPs, a fixed amount of money is automatically invested under a scheme irrespective of the direction of the markets. The very feature limits an investor from buying more when the market is in 'bear' phase and vice-versa. For example, a fixed SIP of Rs 5,000 will be automatically invested during both market 'highs' and 'lows', stealing opportunity from an investor to invest more when market are in fall mode. 

Flex SIPs overcame this shortcoming by tweaking the SIP methodology to pave the way for the valuation based investments. The proportion of investments is linked to a key ratio like P/E ratio or a formula based model designed by a fund house. Flex SIP will activate once the market goes below the pre-fixed key ratio, allowing an investor to invest two-three times of the SIP amount he opted. The opposite is true when the market enters bullish phase. 

Flex STPs function in the same way except for the fact that they transfer funds from an existing debt or liquid investment rather than directly debiting the bank account. Under such an arrangement, an investor is required to invest a lump sum amount in a debt or a liquid fund and opt for STP.

How It Works?

It is easier to understand how the concept works through a hypothetical example. In the table below, we are comparing how a monthly investment of Rs 5,000 will perform both under a flex STP scheme and Regular STP scheme.

Month	NAV Per Unit (Rs.)	Flex STP Investment	Units Purchased	Regular STP Investment	Units Purchased
January’17	10	5000	500.00	5000	500.00
February’17	11	5000	454.55	5000	454.55
March’17	12	5000	416.67	5000	416.67
April’17	13	5000	384.62	5000	384.62
May’17	10	7500	750.00	5000	500.00
June’17	9	8500	944.44	5000	555.56
July’17	8	9000	1125.00	5000	625.00
August’17	10	5000	500.00	5000	500.00
September’17	11	5000	454.55	5000	454.55
October’17	12	5000	416.67	5000	416.67
November’17	15	3500	233.33	5000	333.33
December’17	17	3000	176.47	5000	294.12
Total Units Purchased			6356.29		5435.05
Market Value At the End of December			108056.90		92395.78
Average Cost Per Unit			9.44		11.04

Positives & Negatives

A big plus for opting flex SIP/STP is that an investor can specify the amount that he/she wishes to invest when the market falls below or above the pre-specified key ratio or formula - a feature that makes it affordable for almost everyone. 

On the flip side, an investor is required to maintain the specified maximum amount in his bank account at all times to avert SIP rejections. However, flex STPs do away with the hassle of maintaining bank balances where specified amount are transferred from lump sum investments parked in a debt or a liquid fund. 

Another drawback attached with flex SIP/STPs is that they are only available for selected schemes that again limits the options for investors. 

Undoubtedly, flex SIP/STPs are convenient for sophisticated investors and those well-versed with market dynamics. The concept might sound complicated to beginners, who must approach a professional advisor before venturing into this mode of investment. 

About The Author: Reenika Avasthi is associated with Inverika Investment Solutions LLP as a Content Writer and Financial Planner. She is a Certified Financial Planner and a freelance content writer in the field of personal finance. Her interest in writing and spreading investor awareness motivated her to start blogging.

Visit www.facebook.com/Inverika to learn more.

Home Loan, Rent or Insurance Premium - How Much Is Good?

Home Loan, rent or insurance premium are inseparable part of an Indian household’s expenses. Home loan EMIs dominate the expenses among all and can vastly impact the financial decisions of an individual. For example, servicing a home loan becomes taxing after few years when cost of living scales up, making it difficult to maintain prevailing lifestyles. Similarly, maintaining excessive numbers of traditional life insurance policies might still leave you underinsured and vulnerable at times of unfortunate eventualities. 

It is only wise to keep these expenses in control considering the influential roles they play in an individual's financial life. Evaluating these expenses as a percentage of your total income is one way to ascertain if you are within safe limits or went overboard. Here's is a recommended metrics to help you determine the ratio of these expenses to income. 

Home Loan EMI and House Rent

Going by the thumb-rule, home loan EMI or house rent expenses should not exceed 40% of your total income. That caps monthly outgo at Rs 40,000 for a person earning a monthly net salary of Rs 1,00,000. 

The Way Out

It is natural that salaried individuals are not familiar with this thumb-rule and might be paying home loan EMI as a higher percentage of their income than the recommended one. If this is the case then it's better to divert bonus or any surplus fund into prepaying the home loan at the earliest. Some may argue that investing the surplus amount in a high-yielding investment is better than prepaying home loan that helps in fetching tax benefits, but then it's also not prudent to retain a fixed expense in the times of exceptionally high career uncertainties. Moreover, it is best to repay a home loan if the house is self-occupied and is not an investment. Another better way of managing your home loan is to repay it after 5-7 years when you have reaped most of the tax benefits due to the higher outgo of interest during the starting years. 

At the same time, if the house rent is exceeding the said limit of 40% then you should consider shifting to a lower rent house or another locality. 

Insurance Premium

Fancy insurance policies have flooded the insurance market and leave the onus on the buyer of the policy to pick the right one for himself/herself. The recommended ratio of insurance premium to your total income is 6-8% and the insurance coverage should at least be ten times of your total annual income.

The Way Forward

It makes sense to buy an adequate term plan to meet this goal and invest the remaining surplus in a high yielding mutual fund rather than investing a huge sum into a ULIP or traditional plan. Ensure that the premium outgo is limited to the guided percentage while the high-cost policies such as whole-life plans or ULIPS are surrendered. 

Personal Loans 

The percentage of personal loans to your total income should not exceed 10% at any cost. Also, be cautious while taking a personal loan as it falls into the most expensive category of all loans.

Another Alternative

Borrowing from friends or relatives with interest attached could work well for short-term needs than taking a personal loan. Apart from these, an individual should maintain some form of emergency or contingency funds as a backup to effortlessly meet urgent financial demands. 

If any of your home Loan, rent or insurance premium payments are on the red side of the line then it's high time to bring them in order and employ remaining funds in a better-yielding fund. 

About The Author: Reenika Avasthi is associated with Inverika Investment Solutions LLP as a Content Writer and Financial Planner. She is a Certified Financial Planner and a freelance content writer in the field of personal finance. Her interest in writing and spreading investor awareness motivated her to start blogging.

Visit www.facebook.com/Inverika to learn more.