Equity market volatility has resulted in a number of innovative products being offered to investors. The prepaid systematic investment plan (SIP) from Edelweiss Mutual Fund is one.
The one-time prepaid SIP allows investors to choose from a range of pre-decided initial investments, pre-decided triggers and pre-decided funds. The investor can choose from an initial investment range of Rs 25,000- Rs 250,000, which is invested in Edelweiss Absolute Return Fund (EARF). The fund has low volatility and endeavors to capture the NIFTY's upside movement. Further, a trigger is set off each time the Nifty falls by either one, two or three per cent from its previous close. Depending on the trigger chosen, 10 per cent of the initial investment will move to one of the three pre-decided equity schemes of the fund house.
The fund house believes the product helps investors tackle current volatility in the markets, by accruing more units by investing on days when the market falls. But certified financial planners and those tracking mutual funds aren't very excited about the product, which works more like a flexi-SIP than a normal SIP. Typically, SIPs allow a certain amount to be transferred, irrespective of where the markets are headed. A flexi-SIP allows the investor to invest more when the markets fall and less when the markets are rising.
The primary objective of the scheme, as stated in its fact sheet, is to generate absolute returns with low volatility over a longer tenure. The scheme will accordingly invest in arbitrage opportunities, debt and money market instruments on the one hand, and in pure equity investments and equity derivative strategies on the other.
Planners feel, however, while the mandate gives fund mangers total freedom, implementing it can be a challenge. So, even as one should benefit from averaging in a downward market, investors might lose the opportunity to gain in an upward market. Besides, in a volatile market, the benefits from a falling market may also be limited if the fall occurs at higher levels.
What is also worrying planners is that the investor's funds are all being invested in the same fund house, as against the freedom to invest in different fund houses, if he was doing it on his own.
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According to data from Value Research, a portal that tracks mutual funds, EARF itself has a limited corpus, of Rs 43 crore. The limited size and the low track record offered by other funds into which the investor's money will be transferred to make these unattractive. Of the three funds, the EDGE 100, a diversified growth equity fund, has a corpus of Rs 17.5 crore. The Edelweiss ELSS Fund has Rs 4 crore, while the Edelweiss Select Midcap Fund has a meagre Rs 2 crore, and has only just begun in August. One-year returns from EDGE 100 and the ELSS scheme have been around 16 per cent, while the select mid-cap fund has given 4.17 per cent monthly returns.
Investors are instead advised to look at established funds with longer track records. Edelweiss Mutual Fund is a relatively new fund house.
The product is innovative but may suit those with a lump sum to invest. Those who prefer investing systematically could look at a traditional systematic transfer plan (STP) or a flexi-SIP. An STP allows a fixed sum to be transferred from one fund to another. Based on requirement, investors could pick funds with established records. The advice is to go for funds whose investing mandates are understood by the investor.
The Edelweiss fund has no exit loads while switching between designated equity funds. Besides, taxation will be according to equity fund taxation benefits.