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.

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