1. The Challenge of Irregular Income
Freelancers, consultants, and business owners often experience fluctuating income, with large payments arriving sporadically and lean periods in between. This irregularity makes it difficult to commit to fixed monthly investments like SIPs, which are designed for salaried individuals with predictable cash flows. However, mutual funds remain an attractive option due to their diversification, professional management, and potential for long-term growth. The key is to adopt a strategy that accommodates lump-sum investments while maintaining discipline and managing risk.
2. What is an Asset Allocator Fund?
An asset allocator fund is a type of mutual fund that invests across multiple asset classes, such as equity (stocks), debt (bonds), and sometimes commodities like gold. These funds aim to balance risk and return by diversifying investments, making them less volatile than pure equity funds. In India, asset allocator funds are often categorized as Multi Asset Allocation Funds or Hybrid Funds.
- Example: The HDFC Asset Allocator Fund of Funds invests in equity-oriented funds, debt-oriented funds, and gold ETFs, with a portfolio allocation of approximately 47.57% equity and 33.05% debt as of recent data. This mix provides stability while offering some growth potential.
- Why it’s suitable: For those with irregular income, an asset allocator fund serves as a safe parking place for lump sums. Its diversified nature reduces the risk of market downturns compared to investing directly in equity funds.
3. What is a Fund of Funds (FOF)?
A Fund of Funds (FOF) is a mutual fund that invests in other mutual fund schemes rather than directly in stocks, bonds, or other securities. This structure allows FOFs to achieve broad diversification by selecting top-performing funds across asset classes.
- HDFC Asset Allocator as an FOF: The HDFC Asset Allocator is an FOF, meaning it allocates investments to other HDFC mutual fund schemes, such as equity funds, debt funds, and gold ETFs. This layered approach enhances diversification and simplifies portfolio management for investors.
- Benefits: FOFs are ideal for investors who want a professionally managed, diversified portfolio without the need to select individual funds themselves.
4. What is a Systematic Transfer Plan (STP)?
A Systematic Transfer Plan (STP) is a mutual fund feature that allows investors to transfer a fixed amount or number of units from one mutual fund scheme (the source scheme) to another (the target scheme) at regular intervals, typically monthly. Unlike SIPs, which transfer money from a bank account to a mutual fund, STPs move money between two mutual fund schemes within the same Asset Management Company (AMC).
- How it works: You invest a lump sum in the source scheme, such as an asset allocator fund. Then, you set up an STP to transfer a fixed amount (e.g., ₹10,000) monthly to the target scheme, such as a flexi cap fund. Each transfer is treated as a redemption from the source scheme and a new investment in the target scheme.
- Key benefits:
- Rupee cost averaging: By investing fixed amounts periodically, you buy more units when the target fund’s Net Asset Value (NAV) is low and fewer when it’s high, averaging out your investment cost.
- Risk management: Gradual transfers reduce the risk of investing a large sum at a market peak.
- Portfolio rebalancing: STPs allow you to shift from lower-risk assets (e.g., debt-heavy funds) to higher-risk, higher-return assets (e.g., equity funds) systematically.
- Restriction: STPs are only permitted between schemes of the same AMC, which is why choosing funds like HDFC Asset Allocator and HDFC Flexi Cap, both from HDFC Mutual Fund, is advantageous.
5. The Investment Strategy: Asset Allocator + STP
This strategy is designed to help those with irregular income invest effectively in mutual funds. Here’s how it works:
Step 1: Invest lump sums in an asset allocator fund: Whenever you receive income—whether from a freelance project, business revenue, or other sources—invest the entire amount in an asset allocator fund like HDFC Asset Allocator. This fund’s diversified portfolio, including equity, debt, and gold, provides stability while your money awaits systematic deployment.
Step 2: Set up an STP to a flexi cap fund: After investing in the asset allocator fund, set up an STP to transfer a fixed amount monthly to a flexi cap fund, such as HDFC Flexi Cap. Flexi cap funds invest across large, mid, and small-cap stocks, offering flexibility to capitalize on growth opportunities across market segments. For example, you could transfer ₹10,000 monthly from HDFC Asset Allocator to HDFC Flexi Cap.Why this works:
- Handles irregular cash flows: You invest lump sums whenever you have surplus cash, without needing to commit to regular contributions.
- Diversification: The asset allocator fund spreads your investment across multiple asset classes, reducing initial risk.
- Systematic equity exposure: STP gradually increases your investment in the flexi cap fund, which has higher growth potential but also higher risk, aligning with long-term goals.
- Rupee cost averaging: Monthly transfers via STP average out the cost of your equity investments, mitigating the impact of market volatility.
6. Why Use the Same AMC?
Using funds from the same AMC, such as HDFC Mutual Fund, simplifies the STP process. Since STPs are restricted to schemes within the same fund house, choosing HDFC Asset Allocator and HDFC Flexi Cap ensures seamless transfers. HDFC Mutual Fund is one of India’s largest and most trusted AMCs, managing assets worth over ₹6.1 lakh crore as of March 2024, making it a reliable choice for this strategy. While this approach can be applied with other AMCs offering similar funds, staying within one AMC streamlines execution.
7. Example: How It Works in Practice
Consider a freelancer who earns ₹1,00,000 every quarter from client projects. Here’s how they can implement this strategy:
- Quarter 1: They receive ₹1,00,000 and invest it in HDFC Asset Allocator.
- STP Setup: They set up an STP to transfer ₹10,000 monthly from HDFC Asset Allocator to HDFC Flexi Cap.
- Over 3 Months: ₹30,000 (3 x ₹10,000) is transferred to HDFC Flexi Cap, leaving ₹70,000 in HDFC Asset Allocator.
- Quarter 2: They receive another ₹1,00,000, invest it in HDFC Asset Allocator, and continue the STP.
- Year-End: Over 12 months, they’ve invested ₹4,00,000 (₹1,00,000 x 4 quarters) in HDFC Asset Allocator, with ₹1,20,000 (₹10,000 x 12 months) transferred to HDFC Flexi Cap. The remaining balance in HDFC Asset Allocator continues to benefit from its diversified allocation.
This approach ensures the freelancer invests lump sums when available and systematically builds equity exposure, reducing the risk of market timing.
8. Benefits of This Strategy
This strategy offers several advantages for those with irregular income:
- Flexibility: You can invest whenever you receive income, without the pressure of monthly commitments.
- Risk reduction: Parking lump sums in an asset allocator fund, which has a “High” risk rating, is less volatile than investing directly in a flexi cap fund, which has a “Very High” risk rating.
- Systematic growth: STP allows you to gradually increase exposure to equity markets, which have historically offered higher returns over the long term.
- Convenience: Once the STP is set up, transfers occur automatically, requiring minimal ongoing effort.
- Diversification: The asset allocator fund’s mix of equity, debt, and gold provides a balanced starting point, while the flexi cap fund offers broad equity exposure.
9. Risks and Considerations
While this strategy is effective, it’s important to consider the following:
- Risk Profile: HDFC Asset Allocator has a “High” risk rating due to its equity and debt exposure, while HDFC Flexi Cap has a “Very High” risk rating as an equity fund. This strategy is best suited for investors with a long-term horizon (at least 5-7 years) who can tolerate market fluctuations.
- Tax Implications: STP transfers are treated as redemptions from the source scheme and new investments in the target scheme, potentially triggering capital gains tax:
- HDFC Asset Allocator: As a hybrid fund with less than 65% equity (approximately 47.57% equity), it is taxed as a debt fund. Short-term capital gains (STCG) for holdings less than 3 years are taxed at your income tax slab rate, while long-term capital gains (LTCG) for holdings of 3 years or more are taxed at 20% with indexation.
- HDFC Flexi Cap: As an equity fund with over 65% equity, STCG (less than 1 year) are taxed at 15%, and LTCG (1 year or more) are taxed at 10% on gains above ₹1 lakh per financial year.
- Each STP transfer may incur taxes on gains from the asset allocator fund, depending on the holding period and returns.
- Market Timing: While STP reduces the risk of investing at a market peak, it doesn’t eliminate market risk entirely. Monitor your investments periodically to ensure they align with your goals.
- Exit Loads: Some funds may charge an exit load for redemptions within a specified period. Check the exit load policies for both funds before setting up an STP.
- Performance Variability: The returns of both funds depend on market conditions and the fund manager’s decisions. Past performance, such as HDFC Flexi Cap’s 17.17% 1-year return or HDFC Asset Allocator’s 16.44% annualized return since inception, is not a guarantee of future results.
10. How to Set Up an STP
Setting up an STP is straightforward and can be done through the AMC’s website or investment platforms. Here’s a general guide:
- Invest in the Source Scheme: Purchase units in HDFC Asset Allocator by investing your lump sum through the HDFC Mutual Fund website or platforms like Groww or ET Money.
- Access Your Account: Log in to your mutual fund account via the AMC’s portal or an investment platform.
- Navigate to STP Options: Find the STP section and select HDFC Asset Allocator as the source scheme and HDFC Flexi Cap as the target scheme.
- Specify Transfer Details: Choose the transfer amount (e.g., ₹10,000) and frequency (e.g., monthly). Some AMCs may require a minimum transfer amount, typically around ₹1,000.
- Confirm and Activate: Review and confirm the STP setup. The transfers will occur automatically on the specified dates.
11. Adapting the Strategy to Other AMCs
While this article uses HDFC Asset Allocator and HDFC Flexi Cap as examples, the strategy can be applied with other AMCs that offer similar funds. For instance, you could use ICICI Prudential’s Multi Asset Allocation Fund and Flexi Cap Fund or SBI’s equivalent schemes, provided they allow STPs between them. Always verify the funds’ asset allocation, risk profile, and STP eligibility before investing.
