How and when to invest in SIP variants when the market is facing turbulence

If they are able to deliver out performance in actual market conditions, investors may invest more through them

In recent years, Indian investors have already adopted the mantra of investing through systematic investment plans (SIPs) in a big way. The industry has so far garnered 2.78 million SIP accounts. Fresh collection via the SIP route was Rs 8,324 crore in July 2019. And the total SIP assets under management stood at a healthy Rs 2,81,393 crore. Now, several players are trying to tweak the regular SIP to make it more effective and enhance investors’ returns. 

In a regular SIP, the investor puts in a fixed amount every month. When the market falls, his SIP buys a higher number of units, and when it rises it buys fewer units. Over time the cost of purchase of units gets averaged out. This is referred to as rupee-cost averaging. SIPs basically remove timing risk from mutual fund investments. Investors don’t have to worry about whether this is a good time to enter. Averaging out of purchase cost also helps improve return. 

Rank MF’s SmartSIP Plus: RankMF, the mutual fund distribution arm of Samco Securities, has launched SmartSIP Plus, which divides the investor’s SIP amount in two schemes—an equity and a liquid scheme. The amount allocated to them is based on a variable called margin of safety.  

Margin of safety is an investment principle wherein a value-oriented investor puts money in a share when its market price is below its intrinsic value (as estimated by the investor). RankMF calculates the margin of safety index (MosDex) for each equity fund by comparing its intrinsic value with its net asset value. The MosDex value ranges from 0-200. When the score is above the average mark of 100, the margin of safety is high, and vice versa. The margin of safety score is high when the equity market is cheap. 

When the margin of safety is low, most of the SIP amount gets invested in a liquid fund. When it is very low, some equity fund units are sold and the money is invested in the liquid fund. If the margin of safety is moderate, the SIP amount gets invested in the equity fund. If it is high, the SIP amount gets invested in the equity fund, and in addition, some liquid fund units are sold and invested in the equity fund. “If the margin of safety goes above 110, we double the investment in equities. If it falls below 90, we put the money in a liquid fund instead of the equity fund. If it goes below 80, we book 35 per cent profits in equities and put the money in the liquid fund. Again, when the market comes to, say, 105, we shift money from liquid fund to equity fund,” says Omkeshwar Singh, head of mutual funds, RankMF.  

A normal SIP invests the same amount each month, irrespective of market valuation. By varying the amount invested in various market conditions, SmartSIP Plus further lowers the purchase price of equity units and thus helps the investor earn better returns. SmartSIP Plus also lowers portfolio risk by reducing the number of equity fund units purchased when markets are expensive, and by moving money to the liquid fund. Rank MF’s SmartSIP Plus is available with all equity funds. 

According to Singh, back-tested data shows that SmartSIP Plus can deliver an average outperformance of four percentage points annually over a plan-vanilla SIP.

FundsIndia’s SmartSIP: FundsIndia offers this facility in collaboration with Franklin Templeton Mutual Fund. Here a fixed SIP amount gets allocated between two funds. The default allocation between the equity fund and the debt fund is 70:30, which changes every month based on market conditions.  

The allocation is decided by Franklin Templeton Mutual Fund. “They decide the allocation based on two factors--valuation and momentum. When the market seems expensive or downward trending, equity allocation is reduced. And when the market seems cheap and upward trending, equity allocation is increased,” says Gourav Kumar, principal research analyst, FundsIndia.com.

At present, Fundsindia offers this facility with just one equity fund (Franklin India Equity Fund) and one ultra-short-term debt fund (Franklin India Ultra Short Bond Fund). “Franklin India Equity is a multi-cap fund with a long history and a sound track record. Since it is a multi-cap fund, it responds more to market factors. Large-cap funds tend to respond less, while mid- and small-cap funds are too volatile. An ultra-short-term fund has been chosen on the debt side to avoid duration risk,” says Kumar. He adds that outperformance by their SmartSIP varied from 0.5-2.5 percentage points annually vis-à-vis a static 70:30 portfolio.

Value-averaging investment plan (VIP): This is another method of investing that tries to lower the purchase price of units more effectively than a regular SIP. Here, a base monthly investment amount is selected, say, Rs 10,000. It is assumed that the investment will grow at a specific rate, say, 1 per cent each month. If the invested corpus grows at a lower pace than this, the amount invested next month is hiked. On the other hand, if the corpus grows at a faster pace than the expected rate, the amount invested next month is reduced. “Only seasoned investors who can invest different amounts each month should opt for it,” says Nikhil Banerjee, co-founder, Mintwalk. 

Should you opt for these SIP variants? The basic idea behind these SIP variants is good. “They basically try to help a person benefit from market volatility,” says Banerjee. 

However, they use proprietary methods to assess when the investor should be more aggressive or more conservative. “The key is whether their algorithms have the ability to time the market on your behalf. This needs to be tested under actual market conditions. These products do not have enough history. Whatever outperformance claims is being made is based on back-tested data,” says Banerjee. 

Banerjee suggests that experienced investors may put 15-20 per cent of their total SIP amount in these plans. “If they are able to boost return over time, investors may increase allocation to them,” says Banerjee.