Does Smart SIP ensure a smarter investment in all scenarios?

Does Smart SIP ensure a smarter investment in all scenarios?

Considering investments in smart SIPs? You should know that smart SIP funds are intelligent options for contemporary investors but there are some aspects to keep in mind as well. Smart SIP facilities are unlike regular mutual funds in India; they are offered by several AMCs (asset management companies) and mutual fund distributors nowadays.

Smart SIPs are more innovative methods for investments where the investor’s kitty is deployed on the basis of current market circumstances. Under this scenario, individuals aim at timing investments via their SIP in India for generation of better returns while creating an alpha in comparison to conventional equity mutual funds or debt funds for instance. This covers investments based on multiple factors with the help of algorithms for evaluation of specific indicators of valuation including P/E (price to earnings) ratios and also finalizing the contribution via SIPs likewise. Through this facility, regular investment amounts are also changed under prevailing circumstances in the market.

Suppose when valuations in the market are high, you will naturally be purchasing lower units of equity funds while also temporarily parking money in various avenues or simply refrain from investing in this cycle. Whenever there is a dip in valuation across the market, naturally people will buy a higher number of mutual fund units. It is more like the flexible SIP option although the control of the amount is dependent upon the movements of the market and it is channelized towards equities accordingly. You can also check out other options like international FOF or even hybrid funds for your investment basket along with Smart SIPs. Various parameters are tapped for working out the time of investment, amount of investment through SIPs in equities and so on.

There is no fixed system or formula for judging the market valuations and their fluctuations, every AMC or mutual fund house will rely on a different system or framework or even algorithm for garnering the final amount in monthly smart SIPs. Some firms may even keep their minimum monthly installments via SIPs under the Smart system to a high threshold such as Rs. 5,000 or so, for the algorithm to seamlessly control transactions on a monthly basis.

Suppose you are investing Rs. 1,000 in any equity fund for 3, 5 and 7 years with regular SIP choices and smart SIP choices on two heads. In the latter, the P/E value will be taken into account and every time, markets witness a dip in valuation, monthly contribution through SIPs will be doubled for buying a higher number of units. Taking this into account, you will find that a regular SIP will give you comparatively higher returns of 5.33%, 10.82% and 13.32% (approximate) over 3, 5 and 7 year cycles in comparison to 5.11%, 9.32% and 12.24% for the same period in case of regular SIPs. This is just an approximate calculation. The returns with smart SIP options may ultimately be considerably higher than regular staggering investments in SIPs made by investors.

Some mutual fund firms have built algorithms where the same amount will be invested but all the money will not be used for equities in case of overvaluation in the market. Rather, a chunk will go temporarily towards liquid funds or other avenues with lower volatility levels. Some may also hold on plans for deploying investments likewise. If the margin of safety is lower, then the fund may be invested securely as well. Yet, there is no fixed rule that these SIPs work properly across varying market conditions. You should thus take your decision in an informed manner. SIP offers more convenience and flexibility for investors, you should not take decisions hastily. Stay invested for a longer duration for accumulating more wealth and fulfilling financial objectives.

Nothing compares to regular investing through systematic investment plan although the smarter options may be more prudent choices at times. However, timing is crucial in this case. Now that you know the broad framework of how these SIPs function, make sure that the money is deployed at the right time and with the right strategy to earn you better returns. That is the only way that smart SIPs will deliver better results than their regular counterparts.

CATEGORIES : Finance Investments


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