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Should you opt for the new `Smart SIP’ way of investing?

To attract more investors to mutual fund schemes and offer innovative ideas, fund houses have added several new features to the plain vanilla SIP option over the years to complement the regular form of investing and help in the accumulation of wealth faster.

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Last Updated: Feb 26, 2020, 11.49 AM IST
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By Jimmy Patel

Ever since the AMFI launched the Mutual Funds Sahi Hai campaign, many people have realised various benefits of investing in mutual funds. One of the key benefits is the availability of a systematic mode of investment with a monthly investment amount of as low as Rs 500.

Systematic Investment Plan, or simply called SIP, is a disciplined way of making small investments in mutual funds at regular pre-specified intervals. It includes a series of consecutive payments of pre-determined amounts over a certain period. It can be daily, weekly, monthly, fortnightly, or even quarterly.

This method of investing is like the recurring deposit (RD) facility offered by banks, where one deposits a fixed sum of money regularly (into RD account) and reaps the benefits of compounded returns on invested capital.

With the SIP mode of investment, the money is deployed at regular intervals in selected equity or debt mutual fund scheme. All one needs to do is select a scheme, define a regular investment amount, pick a date for the monthly deductions, and set the investment tenure. Once set up, the fund house automatically deducts the monthly payment from your bank account and invests it in the scheme.

There is no doubt that SIP itself is a tried and tested way of investing. It is an ever-evolving, convenient investment option. However, to attract more investors to mutual fund schemes and offer innovative ideas, fund houses have added several new features to the vanilla SIP option over the years to complement the regular form of investing and help in the accumulation of wealth faster.

Step-up SIP facility offered by mutual funds allows one to gradually increase the monthly investment amount at regular intervals over the years by a percentage.

Flex SIP option provides the flexibility to either increase or decrease the instalment amount in any month as per the availability of the cash. This can be set in combination with the Trigger SIP option.

With Trigger SIP, one can set either an index level, NAV trigger, Capital trigger, or Time-based trigger. This is to take advantage of any market movement in anticipation.

Due to the averaging of costs and the power of compounding, SIPs make for a smart investment option without having to time the market. But the investments are subject to market risk, and to gain more from the risk, this is a new option introduced by market participants.

Smart SIP Introduced…
One of the latest options is the Smart SIP facility offered by some asset management companies (AMCs) and distributors. Smart SIP is an intuitive way of investment, where the investor’s money is invested based on the prevalent market conditions. Under the option, an individual aim to time their SIP investment to generate higher returns and create an alpha as compared to the regular SIP.

Smart SIP involves factor-based investment technique using an algorithm to evaluate certain valuation indicators such as price-to-earnings (P/E) ratio and decide the SIP contribution amount. In this facility, the regular investment amount is tweaked as per the prevailing market conditions.

Here is an example: when the market valuations are high, one would buy less units of equity mutual fund or temporarily park the money in different investment avenue, or not invest at all for that period. When the market valuation dips, a higher number of mutual fund units will be bought. It is like a Flexi SIP option, but investment amount control is reliant on the way the market moves, and accordingly, it is deployed into equities or not.

It uses a host of parameters to determine when to invest and how much to invest via SIP in the equities. While there is no fixed formula or method of judging the intensity of market valuation, each player will have a different methodology or algorithm to arrive at the monthly Smart SIP amount. Moreover, some players may have kept the minimum monthly SIP instalment amount under the Smart SIP facility to as much as Rs 5,000, for their algorithm to control the monthly transactions.

Let us consider a monthly investment amount of Rs 1,000 in an equity fund for three years, five years, and seven years with regular SIP option and smart SIP option. In the smart SIP option, the PE value was observed, and every time the markets were undervalued, the monthly SIP contribution was doubled to buy more number of units. Whereas in regular SIP option, investment was made in a staggered manner with constant investment amount.

Regular SIP V/S Smart SIP Returns
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*The SMART SIP returns are calculated based on PE valuations and it is assumed that when the markets were overvalued, no investments were made. Every mutual fund house could follow a different way of SMART SIP model.
The above table is for illustrative purpose only. (Source: PersonalFN Research, ACE MF)

As you can see, the returns generated with the Smart SIP option ended up being slightly higher than the regular staggering SIP investment option, provided the suitable investment time period is chosen.

Some players/mutual fund houses have created an algorithm that allows an investor to invest the same monthly amount, but all the invested money will not be invested in equities if the markets are overvalued. Instead, a portion will be temporarily parked in liquid funds or another less volatile investment avenue. Or some may even opt to not deploy the money if the market valuations are high. If the margin of safety is low, then the fund will be invested in a safe option. However, there is no hard and fast rule that Smart SIP will work across market conditions and give you desired results of very high alpha over regular SIP. Hence, make your investment decision wisely.

Although SIP facilities provide convenience and flexibility to investors, fundamentally, avoid making any hasty decisions and stay invested for a longer period to create wealth and accomplish your financial goals.

Remember, the key to investment success is perseverance.

(Jimmy Patel is MD & CEO of Quantum Mutual Fund.)

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

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