Value Transfer Plan (VTP) & Swing Systematic Transfer Plan (SSTP)

Investor’s query: As advised by you, I'm planning to invest the redemption proceeds (Rs.5,00,000/-) of my wife to be in HDFC AMC’s Swing Systematic Transfer Plan (SSTP) & part of my proceeds (Rs.2,50,000) in Goldman  Sachs Value Transfer Plan (VTP). The investment horizon is about 5 - 6 years. Kindly brief me about these schemes and the investment options?

Mr. Gerard Colaco: For an investment horizon of 5 to 6 years, the HDFC Swing STP and the Goldman Sachs VTP are ideal investments. Both are based on the concept of value averaging. I will deal with the Goldman Sachs VTP first.

The Goldman Sachs Mutual Fund Value Transfer Plan (VTP):

The strategy is called the Goldman Sachs Value Transfer Plan (VTP). It is a superior version of a systematic transfer plan (STP). The two funds involved in this strategy are the Goldman Sachs Short-term Fund (debt) and the Goldman Sachs S&P CNX 500 Fund (a passive equity fund that tracks the NSE-500 index).

Let us say you invest Rs 2 lakhs in the Goldman Sachs Short-term Fund. You want to maintain a zero risk profile and so you transfer only 1 percent of this corpus that is Rs 2,000/- per month, to the equity fund. The first transfer will be of Rs 2,000/-. But thereafter transfers will vary.

This is because the first Rs 2,000/- is assigned a growth rate of 15% per annum, which is the long-term average growth rate of equity investments in developing countries like India. Fifteen percent of Rs 2,000/- is Rs 300/- per annum or Rs 25/- per month. In other words, according to the Goldman Sachs Value Transfer Plan, your first Rs 2,000/- should have a value of Rs 2,025/- after a month, to meet the growth target, also called the “value path”.

Now let us assume that there has been sharp fall in the stock market during the first month, and the value of the first Rs 2,000/- reads Rs 1,825/- on the date of the second transfer. In this event, the transfer in the second month will be Rs 2,200/-, that is the second month’s Rs 2,000/- plus the Rs 200/- ‘deficit’ in the value path of the first month’s investment (Rs 2,025 – Rs 1,825), to keep you on the value path of 15% per annum.

Exactly the opposite will happen if the market rises. If after a month your first instalment of Rs 2,000/- has a value of Rs 2,225/-, then only Rs 1,800/- will be transferred. This strategy is based on a concept called value averaging invented by a Harvard professor of finance named Michael E Edleson in the late 1980s. Value averaging beats ordinary systematic investment over a period of 3 years or more.

Unfortunately it is unsuccessful when an individual investor tries it on his own because it requires calculations of the value path every month, for each transfer separately, and disciplined rebalancing transactions according to the market situation. However, when the strategy is implemented by an institution like a mutual fund which has the necessary resources for this work, it is difficult to find a better strategy, because it ensures that greater amounts are transferred to equity when the markets are down and lesser (or sometimes nil) amounts are transferred to equity when the markets rise.

It can be seen from the above explanation that the Goldman Sachs VTP uses value averaging only for purchases. True value averaging also requires amounts in excess of the growth target/value path, to be transferred back to debt. This facility is provided by the HDFC Swing STP.

The HDFC Swing Systematic Transfer Plan:

The HDFC Swing STP does not have a value path independent of a stated monthly transfer, but provides for transfer of excesses over the predetermined growth path back to equity. It can be best comprehended by an example.

Suppose you have invested Rs 10 lakhs in the HDFC Floating Rate Income Fund. You register a Swing STP of Rs 20,000/- per month to one of HDFC MF's equity funds, say the HDFC Top 200 Fund. Here, a 2% transfer is sufficient to maintain a zero-risk or near zero-risk profile overall, because this is much more conservative than the Goldman Sachs VTP.

In the HDFC Swing STP, the objective is simply to stick to a specified growth target, month after month. So if you specify Rs 20,000/- per month, the equity component will be Rs 20,000/- in the first month, Rs 40,000/- in the second month, Rs 60,000/- in the third month, Rs 120,000/- in the sixth month, etc. There is no further enhancement of the amounts transferred by adding an overriding value path.

Let us assume that three transfers have taken place in the first three months. The total growth target of Rs 60,000/- was met in the third month. Now the day has dawned when the fourth transfer must take place. The growth target for equity on this day must be Rs 80,000/-. But because of a market fall, the actual value of the units in the HDFC Top 200 fund is only Rs 50,000/-. The fourth transfer will now be of the order of Rs 30,000/-, to achieve the growth target of Rs 80,000/- at the rate of Rs 20,000/- per month.

Now comes the interesting part where the HDFC SSTP differs from the Goldman Sachs VTP. Let’s assume seven months have passed. Six transfers have taken place to meet the equity growth target of Rs 120,000/- in the first six months. When the date of the seventh transfer arrives, because of a surge in the equity market we notice that the value of units in the HDFC Top 200 Fund is Rs 160,000/-, that is Rs 20,000/- more than the growth target of Rs 140,000/- in seven months. The excess of Rs 20,000/- will now be transferred back from equity to debt, i.e., from the HDFC Top 200 Fund, to the HDFC Floating Rate Income Fund.

Such reverse transfers enable sensible booking of profits during market surges and consequent reduction in the volatility of the portfolio.

To conclude, even though both are based on value averaging, the Goldman Sachs VTP has something that the HDFC SSTP does not and the HDFC SSTP has something that the Goldman Sachs VTP does not.