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What is swing STP?
A swing STP tries to achieve the target market value which can be more or less than the lump sum invested in a debt scheme. To avail of a swing STP facility, an investor needs to invest a minimum lump sum. Swing STP works on the concept of value cost averaging. Here, the system enables the investor to buy more units when the index declines and less when the market goes up, thus booking some profits at regular intervals.
How does swing STP work?
Let's say Mr Smart wants to invest Rs 36,000 over a period of 12 months in a particular fund called Fund Z. In order to do this with the swing STP mode, Mr Smart has to first make a lump sum investment of Rs 48,000 in any fund belonging to the same fund house, let's say Fund A. Having done this, Mr. Smart will instruct the fund house to transfer Rs 2,000 every month from the existing Fund A to the target Fund Z.
The process will start at the beginning of the first month with the first installment of Rs 2,000 being transferred into Fund Z from Fund A. Assuming the NAV of Fund Z is Rs 10 per unit, Mr Smart will get (2000/10) = 200 units of Fund Z.
When the NAV of the target fund goes up
Now, in the following month, let's assume the NAV of Fund Z goes up to Rs 12. The swing STP scheme will compare the total market value of the portfolio and Mr Smart's target monthly investment. So, now the total market value of the portfolio stands at (200 units*Rs 12) = Rs 2,400 and Mr Smart's target monthly investment for the prevailing month should be (Rs 2,000 + Rs 2,000) = Rs 4,000. This gives rise to a difference in the two numbers.
The swing STP now takes the difference of the market value of the portfolio (Rs 2,400) and the target value, which is Rs 2,400 and the target value of Rs 4000 i.e. Rs 1600 and invests this difference to purchase the units of Fund Z. This means that Mr. Smart has purchased (1600/12) = 133 units of Fund Z.
When the NAV of the target fund goes down
Now, next month the NAV of Fund Z is at Rs 8 and hence the market value of the portfolio stands at ((200 + 133) units * Rs 8) = Rs 2664, however Mr. Smart's target investment by this month should be (Rs2000 * 3 months) = Rs 6000.
Again the Swing STP will take the difference of the market value of the portfolio and the expected target value (Rs 2664 – Rs 6000) = Rs 3336 and invest it in Fund Z to purchase additional units. So in this month Mr. Smart will get (3336/8) = 417 units will be purchased. As you can see the Swing STP has enabled the investor to pick up more units when the NAV is lower.
The total units held by Mr. Smart at this point is (200+133+417) = 750 units. So the swing STP essentially enables the investor to cushion himself adequately when the NAV is higher and picks up fewer units of the target scheme. Similarly when the NAV is lower the Swing STP picks up more units of the target scheme.
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