Mutual funds allow retail investors to invest in stock markets without having to worry about stock price movements. Facilities like systematic investment plans (SIPs) allow investors to invest a fixed amount at regular intervals and benefit from rupee cost averaging. Some fund houses also offer facilities like variable SIPs or top-up SIPs. Are these really useful and should you opt for them? According to Gaurav Roy, co-founder and COO of bigdecisions.in, the most important thing is to make goal-based investment. First, one needs to fix the target amount for an identified goal like higher education or retirement and then calculate the amount to be set aside every month (or quarter) depending on the number of years and expected return. You must also check your corpus at regular intervals to see whether you have fallen behind. If for instance, the markets have gone up and you find that your corpus is closer to your target amount, then you can reduce your monthly instalment to that extent. On the other hand, if in a particular month, you have fallen short of your target amount because the market is down, then you can increase your monthly instalment. Usually, the fund house will fix a particular level for the index — both up and down — and advice a range within which investors can change their instalments. But the problem is that somebody has to monitor the market and the value of your investment on a regular basis. Either you or your financial planner or advisor, says Roy. “It is cumbersome to monitor how much to save every month depending on how the market has moved, which is why most investors prefer the regular SIP. A variable SIP works best if the process is automated in some manner.
Typically, a variable SIP should give better returns vis-à-vis a regular SIP since you will be investing more when the markets are down and less when the markets run up,” Roy adds. In a way it is timing the markets and hence it is not advisable for retail investors, says Rajmohan Krishnan, co-founder and MD, Entrust Family Office Investment Advisors. “Earlier there were longer periods when market used to fairly stable. But now markets see huge movements in just tow or three sessions. So, it will be difficult for retail investors to change the instalments. It is useful only if you can predict the market and change your instalment quantum accordingly,” he says. Instead, Krishnan advices opting for a weekly SIP, as there will be one or two weeks when the markets will give better returns. A variable SIP is also not suitable for salaried investors, since they have fixed income and fixed expenses. So, it will be difficult to change the monthly instalment. But it may be suitable for those who have variable cash flows, such as entrepreneurs or small businessmen, since they earn their income in staggered amounts. More than SIP, value averaging works better in a systematic transfer plan (STP), says Manikaran Singal, founder, Good Moneying. “In this case you allocate your funds to a liquid fund and then transfer regular amounts to equity funds. Here, you can change the instalments depending on how the market is performing,” he says. STPs are advised for those who are looking for a regular source of income, such as retired people. Another facility that many fund houses offer is a top-up or step-up SIP, where you can start investing with a lower amount and gradually increase it. For instance, assume you have calculated that for a particular goal, say your retirement, you need to invest Rs 50,000 every month, starting now. But if your current income and expenses do not permit setting aside that much right now, it does not mean that you should not start saving at all. You can start with Rs 25,000 and gradually increase it till you reach Rs 50,000. “Young people who are starting their careers can use this SIP (top-up) to save more as their salary rises every year. This way they can curtail unnecessary spending,” Roy says.