Articles

Did you know that your systematic investment plan (SIP) can be more than just a vehicle to channel periodic savings to investments of choice? Beyond the plain-vanilla SIPs, mutual funds have introduced other facilities that fall into the category of tools that help automate and bring discipline to investment decisions. What are they and do they warrant inclusion in the playbook of the mutual fund investor?

The new SIP variants

The basic SIP has been fine-tuned to make it a more investor-friendly offering. Some of the variations are Perpetual SIPs that eliminate the need to renew the SIP periodically, SIPs that allow investments into more than one scheme to enable diversification, and SIP pause which is a better way to suspend SIPs during times of financial constraints and allow you to resume the investment without having to go through the entire process of making a fresh SIP application.

“Our endeavour is to offer simple solutions which empower investors to realise their financial goals. The features under Super SIP allows investors to, through one application, plan, start and track multiple SIPs for multiple goals with flexibility to adjust their investments through ‘top up’ and ‘pause’ features," said Lalit Vij, managing director, Principal Mutual Fund.

The facility to sign up for multiple SIPs using a single mandate is offered by other mutual funds, too, to make the process of building and managing the mutual fund portfolio easier.

Give wealth building a boost

The house or holiday that seemed perfect a few years ago may seem inadequate as your income and aspirations grow. Providing for this by increasing the SIP instalment amount periodically will ensure you have a larger corpus and you don’t fall short of funds to meet your goals and even reach them faster. This feature, known by various names such as SIP Top up and Booster, allows you to increase the SIP amount periodically so that your savings and the corpus keeps pace with the growth in your income and aspirations. “More disciplined investors may adopt it to give a leg-up to their corpus. But with most investors, it is predictability of the SIP that found favour. They may find it difficult to maintain the same discipline when the amounts are likely to change," said Gajendra Kothari, managing director and CEO, Ética Wealth Management Pvt. Ltd.

Managing risks

The SIP Flex, Flexi and Swing STPs and Triggers are features that investors can use to manage exposure to different asset classes such as equity and debt.

You select the level of the index’s PE ratio at which you believe the markets are over-valued. When this is breached then your SIP instalment into equity is reduced under the SIP Flex and Flex STP tools and vice-versa. Swing STPs allow investors to move funds from equity schemes to debt schemes and back depending upon the level of the markets. When you move out of a market that has run up you restore balance in your portfolio that is likely to have become skewed towards this asset and thus reduce the risk of the portfolio taking a larger hit when the correction happens.

Time the market

Flexible SIPs and STPs can also be used to increase or decrease the SIP instalment amount based on the level of the market; in other words, buy more when the markets are low and vice-versa. Triggers such as the PE ratio is used to determine if the valuations in the market are expensive or attractive and whether the level of investment should be decreased or increased. “Investors who are more focused on their asset allocation and goals may not really be interested in making tactical changes based on market movements," said Renu Maheshwari, chief executive officer at Finzscholarz Wealth LLP.

The value investment plan (VIP) enables you to buy more when markets are low and less when markets are high while keeping the required goal accumulation in mind. Here, the periodic investments depend on the value of the already accumulated units on the SIP date. The accumulated investment value is compared to a target value that is predefined based on your goals. If the value of the accumulated investments falls short of the targeted value, which may happen when markets are down and the net asset values (NAVs) are down, then the latest instalment will be of a higher value to make up for the shortfall and to get the accumulated value to the targeted value. The reverse happens when markets are high and NAVs are high.

What to watch out for

These tools are, however, not for everyone. Investors need to be informed and experienced to be able to make the choices that these tools require. There are inherent drawbacks that make it difficult to implement them too. The flexible SIPs and STPs and the trigger-based investment plans may require a much higher commitment of funds than the regular SIP instalment whenever the trigger is activated. For example, if the regular instalment amount is ₹1,500, then a fall in the market and the activation of the trigger may require you to invest as much as₹4,500 or more depending upon the terms of the facility. Not everybody can find such investible surplus at short notice.

“These facilities need a steep fall in the market or a frothy market to make a difference, and those situations don’t always arise in Indian markets," said Kothari.

Also, using the level of market to determine the investments may lead to a degree of uncertainty on the final corpus that is accumulated. This is because there may be periods when markets are seen as expensive and the investor would be investing less, thus affecting the final corpus.

Exit loads and taxes are important considerations to keep in mind while implementing tools that allow moving between different schemes based on market levels. They eat into the gains made.

Mint’s take

A new investor will be intimidated by the choices to be made to implement these tools and is best introduced to a plain-vanilla SIP. “The industry saw unprecedented growth in SIPs in the last three years with many first-time investors choosing the SIP route. As a significant percentage of SIPs are from new investors, there is limited awareness about SIP-related variants and service conveniences. Adoption of these product variants should pick up as these investors mature and gain more exposure to the category," said Anuj Kumar, president and CEO, CAMS.

Investors should refine their SIP experience and help it do more by signing up for plans that increase the amount periodically and opt for facilities like Perpetual SIP and SIP Pause that improve convenience. Seasoned investors should use tools like Swings and Triggers to help manage risk by rebalancing the portfolio rather than for tactical shifts in response to market levels. However, as the complexity increases, it requires greater monitoring from the investor. Make sure you keep a close eye on your investments so that the focus does not shift away from the goals.