BackGive your SIP a booster dose of flexibility
Experienced investors can use rule-based systematic investment plans to enhance long-term returns
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The systematic investment plan (SIP), a tool that helps you build a portfolio in mutual funds through regular contributions, is a tried and tested route for at least the past 15 years. What an SIP does is allocate your money at a predefined frequency into a mutual fund scheme of your choice. Other than getting you invest regularly, an SIP also evens out the noise or the short term ups and downs in market prices. This is especially relevant for equity-oriented schemes as daily prices are impacted by changes in market value led by sentiment. With regular investment, over a period of time, you will end up buying when markets are rising as well as when they are falling, thus smoothening out the average price at which you invest.
However, investors who are well versed with funds and SIPs have the option of making it a bit more flexible. These rule-based SIPs, offered by fund houses and even structured by investment advisers (both online and otherwise), can help you take advantage of sharp moves in markets in the near term. But understanding nuances is important.
Rule-based SIPs
Unlike a simple SIP where you allocate a fixed amount on a monthly basis for a few years, in rule-based SIPs, you have the flexibility to change the amount you invest based on some pre-determined event.
“The thought behind having flexibility with SIPs is to make investing more convenient. We don’t want investors to be scared about an SIP or stop it during its course," said Srikanth Meenakshi, co-founder, Fundsindia.com, an online investing platform. At a basic level, the platform offers its clients a way to increase SIPs beyond the pre-determined monthly amount (subject to a maximum level) in any given month. It also allows clients to pause SIPs and have a pre-programmed step-up increase in the amount. There is additional flexibility by adding a value-averaging feature in SIPs. Srikanth said that 20-25% of SIP-holders on the platform opt for flexibility, but more traction is seen in simpler concepts like monthly flexible amount. Advanced concepts like value averaging-based SIPs have only 1-2% takers.
Flexible SIPs allow you to have a range rather than just one fixed amount. One of the most common ways of building a flexible SIP is to opt for a value-based SIP. This involves ascertaining a predefined value for your investment at the beginning and then, if the value falls, you invest more; if it moves higher, you invest less in a month. For example, ICICI Prudential Asset Management Co. Ltd offers a Value STP (systematic transfer plan) based on a predetermined investment target value, which can be defined weekly, monthly or quarterly. If on the chosen date, the value of your investment is lower than the target, your STP amount will increase; it will be lower if on that day the value of your investment is above the target. An STP is an SIP started from a lump sum that is already invested in another fund.
Another example is the HDFC Swing STP, where the value is determined based on the net asset value (NAV) of the fund when you start. If the NAV falls on your chosen day, you invest proportionately more in the fund. The idea is to invest higher amounts when markets fall, but the minimum you invest in a given period is your original STP amount.
Edelweiss Asset Management Ltd calls it a prepaid SIP. A switch is triggered into an equity-oriented fund based on a pre-decided fall (percentage change compared to the previous day) in select indices. Vikaas Sachdeva, chief executive officer of the fund house, said, “The facility enhances returns of an SIP by letting investors take advantage of timing. Moreover, if markets get too volatile, the change is limited to three per month."
The idea is to tell investors to get money into equity as early as possible without worrying about a further fall in the market, he said. It is not about timing the market, but take on an additional opportunity.
Rahul Parikh, head, Aditya Birla Money MyUniverse, said, “We are looking at including flexibility in SIPs for our clients through solutions like value averaging and step-up SIP. Given that ours is a personal finance service, we have to anticipate client needs and have an automated solution rather than a manual one. These facilities can enhance the experience as events change over time."
There are other similar options available and if you are comfortable with these tweaks, ask your adviser or fund house about what’s available.
Create your own rules
You can always make your own SIP rules. The automated rules are there to facilitate the process, but defining parameters such as when you want to adjust your SIP amount, can be done by you as well. Financial planners and advisers are in the know of financial events that can potentially change the course of regular investments. Care should be taken around events which necessitate such changes.
Nisreen Mamaji, certified financial planner, and founder, Moneyworks Financial Advisors, said, “The idea of starting an SIP is to have a disciplined approach. Interspersing it with flexibility can take away from this basic quality. Manual top-ups are done depending on financial events like bonuses or job change. With comprehensive financial planning, the investible surplus is used as necessary."
Asset management companies offer facilities like SIP top-up, which allows you to increase the amount you invest through an SIP after a minimum investment period of six months. Hence, any change in finances can get addressed through this. Some AMCs such as ICICI Prudential AMC and L&T Investment Management Ltd, among others, have an SIP pause facility for times when your cash flows may be uncertain.
If you are in a stable job, it makes sense to take a fresh look at your SIP allocation as income increases. Or, it could be that you regularly keep money aside in stable liquid or ultra-short term funds meant for short-term use, but don’t use it for 3-6 months. This money can be gradually invested as a long-term allocation in equity funds through an SIP or a top-up SIP.
If you are not consistent in monitoring your investments and find it difficult to determine these rules yourself, your financial adviser can help.
Kartik Jhaveri, founder and director Transcend Consulting, said, “We sit with clients annually to take a re-look at investments, and SIP top-ups can happen as a process. Any change is linked to an evaluation of financial goals. Moreover, amounts need not change simply because of a salary hike; instead, as you move along the estimates, future expenses change and that needs to be monitored regularly."
Mint Money take
If these dynamic SIP facilities are used diligently, returns can be enhanced. But there is the danger of inefficiency due to a lack of proper understanding. Such facilities are not meant for the novice or the conservative investor. “There are too many variables to say if such plans work well consistently. Ultimately, in a few years, an SIP in any form will help. How do you know when to do more or less? What matters is to keep the time frame of an SIP relatively longer," said Jhaveri.
Your view on market direction matters and will reflect in how the strategy performs. For example, you might think that it is a good idea to increase allocation when markets fall and reduce when they rise. But you have to define how much of a market fall or rise warrants a change in the SIP allocation. A trigger set at 1% market change might lead to frequent adjustments; this may not help you reduce volatility. On the other hand, even setting the trigger at a 10% fall could be ineffective in a bull market.
Hence, rule-based SIPs require careful thought. These are not for first-time investors; even an experienced investor may need an adviser before picking such options.
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