Should you use smart tools to vary your SIP with stock market movements?

When markets face uncertainty, investors start having doubts about their ongoing systematic investment plans (SIPs) in mutual funds.

The dilemmas range from whether to continue with the SIPs or stop them, to scale back or increase the amount, and so on.

To help investors tackle these concerns and squeeze more out of SIPs, investment platforms and fund houses keep launching SIP variants.


So how effective are these smart tools? Can investors benefit from tinkering with the SIP structure?

Modified SIPs work best for those who have sufficient liquidity at all times

	Normal SIP	Flexi SIP	Value SIP
Total units bought	207.17	189.25	233.90
Invested amount	1,15,000	1,05,000	1,29,575
Avg cost per unit	555.09	554.83	553.99
Final corpus	1,17,059	1,06,930	1,32,157
Return	1.8%	2.1%	2.2%

Assumptions: Under normal SIP, investor puts in Rs 5,000 every month. Under Flexi SIP, investor puts in half the amount if fund NAV gains more than 2% a month or double the amount if NAV falls more than 2%.

Under value SIP, investor targets 1% monthly return on investment and amount is determined accordingly.

*Calculation based on SIP outgo on 1st of every month from Jan 2017 to Nov 2018 in Franklin India Equity. Return as on 30 Nov 2018

Rewiring the outflow
In a conventional SIP, a fixed sum is deducted from your bank account every month to be invested in a scheme of your choice, for a pre-determined period of time. Regardless of market ups and downs, the SIP flow remains constant.

For investors who are not comfortable with this system, new-age tools offer enhancements to the structure. These allow investors to modify the traditional SIP and be more responsive to market fluctuations. For instance, Rank MF, the research platform of Samco Securities has recently introduced SmartSIP that generates ‘signals’ that tell you when to begin your SIP, if you should continue with an existing SIP, skip a particular month or double your SIP in any month based on market valuations.

There are myriad other solutions on offer to allow investors to modify the SIP amount. So, instead of putting in a fixed amount, say, Rs 3,000 in the scheme every month, you can put in Rs 5,000 in a particular month and only Rs 1,000 the next, depending on certain parameters.

For instance, online investment platform Fundsindia offers the Value-averaging Investing Plan that uses a certain return percentage as a target for the investment and invests an amount relative to that target. In this system, when the investment performs well relative to the target, the subsequent investments are lower. When the investment does not perform relative to the target, the subsequent investments are higher.

Several fund houses offer trigger-based SIPs where the amount is determined by certain triggers such as the broader market hitting a particular valuation multiple or the scheme NAV changing by a certain percentage. For instance, flexi SIP facility by Kotak Mutual Fund takes into account the prevailing PE of the Nifty50 index to decide the quantum.

Simplify, don’t complicate
The argument is that by investing more or less at different points of time, the investor can optimise the SIP and get the most out of market fluctuations. Essentially, these ‘smart’ or ‘enhanced’ SIPs introduce an element of market timing to the traditional structure.

However, some of these may prove counter-productive in the long run. A flexi SIP structure, for instance, could leave you under-exposed to the market, putting lesser money at work towards your goals. While there is potential for better return, the magnitude of gain might be different from that of a comparable SIP. “Theoretically, a flexible SIP is a good option but, in reality, it may lead to lesser savings in the long run if enough money is not regularly invested because of expensive valuations,” says Tanwir Alam, MD, Fincart.

Over many years, even if you earn higher returns through modified SIPs, your final corpus could turn out to be much less than what you desire. A tool like value-averaging is better suited to ensure the investor achieves the target corpus as it keeps adjusting the monthly SIP flow relative to the target. “With value SIP, you can be more assured of reaching the desired target as it is designed to make up for any shortfall at any given point of time,” says Suresh Sadagopan, Founder, Ladder 7 Financial Advisories.

While tweaking SIPs may bring some benefits, experts urge investors to maintain investing discipline. The SIP tool is meant to simplify mutual fund investments and facilitate disciplined savings for those with recurring monthly income. Since the cash flows under a modified SIP are unpredictable, this is only suitable for those who have sufficient liquidity at all times. Salaried individuals with limited savings would be better off continuing with a plain vanilla strategy. Advisers say investors should opt for SIP top-ups at yearly intervals only to align their investible corpus with their rising income.