Smart SIP can give Rs 23 lakh higher return on Rs 5,000 monthly investment in a bull run than regular SIP; know how it works Unlike fixed traditional SIPs, smart SIPs adjusts investment amounts based on the market conditions to optimise returns and reduce risk. However, their effectiveness can vary depending on market cycles. How does a smart SIP work? Do smart SIPs always give you more return than traditional SIPs?
Systematic investment plans (SIPs) have become a preferred choice for many. In traditional SIPs, you typically invest a fixed amount in a mutual fund at regular intervals — say, Rs 10,000 in an equity mutual fund on the fifth of every month. Irrespective of the market condition, your investment amount remains fixed. If you are disciplined, you will get a hefty return from your SIP in the long run, thanks to compounding. However, there is an option called "smart SIP" that will help you take advantage of the market conditions and potentially increase your return.#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;} What is a smart SIP? How does a smart SIP work? Do smart SIPs always give you more return than traditional SIPs? All you need to know about smart SIP before you invest.
What is a smart SIP?
A smart SIP is designed to optimise the returns by taking the market conditions into consideration before investing, says Gautam Kalia, Head-Super Investor, Sharekhan. Think of it as an upgraded version of the traditional SIP that adjusts investment amounts based on the market conditions to optimise returns and reduce risk. Unlike a regular SIP, smart SIPs increase contributions when the market is falling and reduce them when the market is rising, explains Soumya Sarkar, Co-Founder of Wealth Redefine.How do smart SIPs work?
Smart SIPs operate by adjusting the investment amount based on market valuations, says Anand K Rathi, Co-Founder of MIRA Money. It follows a simple strategy of buying low and selling high. When the stock market is fairly valued, it typically invests your monthly SIP amount into equity mutual funds. When the market is relatively undervalued, it doubles your monthly SIP amount. When the market is expensive, it skips investing your money in equity schemes and puts the money in liquid funds. When the market is very expensive, it books profits by selling a part of your mutual fund units and invests the amount and monthly SIP instalments in liquid funds.However, there is no assurance that a smart SIP will always deliver a better return; sometimes it can work otherwise.
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Rathi says, "Smart SIPs operate optimally in specific market cycles. In a bull market, the returns from smart SIPs may be lower than regular SIPs due to the decreasing investment amount when market valuations rise. However, smart SIPs can shine in a bear market, investing more as the market falls. This potential for higher returns, especially in bear markets, can optimise your investment strategy."
Samir Shah, Head-Online Business, Axis Securities, explains a smart SIP using an example: "Mr A invests Rs 5,000 on the 5th of every month through a traditional SIP. Regardless of market conditions, his investment remains fixed at Rs 5,000 each month. In contrast, Ms Z uses a smart SIP. She plans to invest Rs 5,000 in a smart SIP when market valuations are neutral. If the market is up, she invests only half of the amount (Rs 2,500) , and if the market is down, she invests twice her original SIP amount (Rs 10,000). This strategy allows her to benefit from market momentum: during market downturns, she buys more units, and during market highs, she invests less.”
How do fund houses know when to reduce or double your SIP amount based on the market?
Every fund house has its in-house valuation matrix by which it decides if the market is cheap, neutral or expensive. The same model is used for smart SIPs, says Nitin Rao, Head of Products and Proposition, Epsilon Money. "This is nothing but an asset allocation model."The fund manager’s decision-making process typically involves asset allocation, macroeconomic indicators, moving averages, volatility index, P/E ratio, explains Kalia.
"Fund houses utilise a combination of quantitative and qualitative techniques to allocate investors’ SIP amount. These strategies often involve employing statistical models and data-driven approaches to identify patterns and correlations within the market, while also considering qualitative factors such as economic conditions, industry trends, and company-specific news to assess the underlying value and potential of investments. To mitigate risks, fund managers implement strategies such as diversification, hedging, and stop-loss orders. Additionally, they use mathematical models to construct well-diversified portfolios that align with the fund's objectives and risk tolerance," says Ramneek Ghotra, Chief Growth Officer, Finvasia.
Kotak Mahindra AMC offers a smart SIP on the Balance Advantage Fund asset allocation model and there is no intervention from the fund manager, says Manish Mehta, National Head-Sales, Marketing and Digital Business, Kotak Mahindra AMC. In this model, the fund house uses the Balance Advantage Fund as a benchmark, and if the fund's equity allocation is over 60% (market is undervalued as per AMC), your smart SIP instalment for that month will be doubled. If the equity allocation is between 40% and 60% (market is fairly valued as per AMC), the usual amount will be debited. However, if the equity allocation drops below 40% (market is overvalued as per AMC), only half of the planned instalment will be debited.
Can smart SIPs generate more returns than regular SIPs?
If we consider a long-term cycle, such as 2011 to 2021, the return difference between smart SIPs and regular SIPs could be around 1.5%, with smart SIPs performing slightly better by 1-1.5%, says Rathi.Now, you have invested Rs 5,000 every month in a traditional equity large-cap SIP. Assuming it has generated a 12% return, you will get Rs 11,20,179 in 10 years, Rs 23,79,675 in 15 years, Rs 45,99,287 in 20 years and Rs 85,01,033 in 25 years.
If you have chosen a smart SIP, you could get a 1.5% higher return than the traditional SIP. When you invest for the long-term, that 1.5% higher return will give you a hefty return. At 13.5% return per annum, you will get Rs 12,13,555 in 10 years, Rs 27,06,657 in 15 years, Rs 55,19,003 in 20 years and Rs 1,08,16,222 in 25 years.
By not selecting smart SIP, you may lose out on Rs 9.19 lakh in 20 years and Rs 23.15 lakh in 25 years.
A smart SIP of Rs 5,000 a month can give you Rs 23.15 lakh higher return than a regular SIP
SIP amount (Rs)5,000
5,000
5,000
5,000
Years
10
15
20
25
12% SIP return (Rs)
11,20,179
23,79,675
45,99,287
85,01,033
13.5% smart SIP returns (Rs)
12,13,555
27,06,657
55,19,003
1,08,16,222
Loss by not choosing smart SIP (Rs)
93,376
3,26,982
9,19,716
23,15,189
Who offers smart SIP?
Currently, Axis AMC, HDFC AMC, and Kotak AMC offer smart SIPs. A customer has to select a base amount on which the maximum investment can be doubled and the minimum investment can be 0.5 times based on market valuation, says Mehta of Kotak AMC."Investors need to fill out a separate smart SIP form, which allows them to choose their minimum and maximum investment amounts. Some AMCs have fixed minimum and maximum amounts, while others offer more flexibility," says Shah of Axis AMC.
If you are investing in smart SIP, keep this in mind
Smart SIPs operate optimally in certain market cycles. "In a bull market, the returns from smart SIPs may be lower than regular SIPs due to the decreasing investment amount as market valuations rise. However, smart SIPs can shine in a bear market, investing more as the market falls. This potential for higher returns, especially in bear markets, can inspire optimism in your investment strategy," adds Rathi.The difference in returns may not be uniform for all time durations and depends on the market cycle, benchmark selection, rule for SIP amount change and the type of market trend at that time.
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This story originally appeared on: India Times - Author:Faqs of Insurances
