Use SIP variants as portfolio diversifiers for better cost averaging

With systematic investment plans (SIPs) witnessing significant uptake for the past few years, distributors are launching new variants to get a pie. Recently, SAMCO Securities, which ventured into mutual fund distribution through its platform RankMF, launched Smart SIP. The variant decides on the SIP amount, based on the market valuations and a scheme’s portfolio. 

The investor starts with a fixed monthly SIP amount ranging between Rs 2,500 and Rs 100,000. Based on the market condition and the scheme’s portfolio, RankMF’s algorithm sends triggers. If the market is expensive, the trigger suggests the investor skips his SIP. If the market is significantly undervalued, the investor has to double the SIP. If the equity valuations are close to historical peaks, an investor is suggested to redeem a particular portion and keep in a liquid fund. 

“Such triggers may occur three-four times a year but can significantly impact the returns. For the rest of the year, the investor continues with the fixed amount,” says Omkeshwar Singh, head, RankMF. Based on RankMF’s historical research, the product gave 5.9 per cent higher returns than a traditional SIP.

Many other distributors have been running and introducing newer SIP variants. FundsIndia, an online investment platform, has been offering value-averaging investment plan (VIP). In this, the investor decides a return target – it can be 10 per cent, 12 per cent, or 15 per cent, based on the scheme’s historical returns. Based on the market valuations, the SIP amount varies. The investor invests a higher amount when markets are down and vice versa.

As the amount varies every month, the individual needs to specify a range that can be debited every month from his account – for example,  Rs 5,000 to Rs 15,000. “Such SIP variants are meant for experienced investors, who have been investing for some years and understand how equity investment works,” says Vidya Bala, head, mutual fund research, FundsIndia. According to Bala, in the last five years, VIP has 75-130 basis points higher returns than the regular SIP.

Other variants like flexi SIPs, step-up SIPs and top–up SIPs are also available. Investment advisors say an investor needs to see the outperformance of a strategy over regular SIP over different periods, and then decide whether it makes sense to get involved in such strategies and put in efforts actively. 

“We did look at a few strategies and found that the difference between the regular SIP and its variants are not much, and therefore, not worth the effort,” says Lovaii Navlakhi, managing director and chief executive officer, International Money Matters.