SIP with a twist: Fintech platforms and mutual funds tweak the plain, old SIP. Is it worth it?

Kotak Mahindra Asset Management Company has also recently started offering what it calls Smart SIP. Distributors such as RankMF and FundsIndia also offer such plans in the name Power SIP and Smart SIP, respectively.

But what do these SIPs do?

While the traditional SIP invests a fixed sum of money at regular intervals like monthly or weekly, these differentiated SIPs intend to invest more in equity funds when the markets are falling and invest less when the markets are flying in the high-valuation zone. While a few such facilities deduct a fixed amount from your bank account, some others may keep varying the amount within a stipulated band using an in-house formula.

For example, RankMF deducts a fixed amount each month from your bank account and invests a certain part of that money into a chosen equity fund and rest in a liquid fund based on an in-house valuation model. Every month, based on its reading of the markets, it decides how much goes into the equity and how much in the liquid fund. The money invested in the liquid fund stays there till stocks fall and valuations turn attractive. When the model indicates a favourable timing, the money so kept in the liquid fund is channelled into the equity fund.

HDFC Flex SIP, on the other hand, invests a sum of money that is the higher of the fixed sum you have agreed on or the sum calculated based on the market value of past investments, fixed sum of money agreed to be invested and number of instalments.

Step it up, slowly

Many of us get a salary hike every year. Financial planners always suggest increasing your SIP commitments every time you get a salary hike.

“With rising income, expenses also go up as the lifestyle improves. Many of us start small and there is a need to fill that gap in investments. As your income goes up, you have to increase the SIP amount to take care of general inflation, lifestyle inflation as well as new financial goals you may have,” said Parul Maheshwari, a Mumbai-based certified financial planner.

Step-up SIPs help you do just that. A few of these ask the investors to commit the increased SIP amount and the time interval at which such increases need to be implemented. For example, you start with a fixed sum for an SIP and choose to increase your SIP by, say, 5 percent every six months.

However, some distributors do not ask for any prior commitments and instead increase SIP amounts at any time during the tenure of the existing SIP.

A step-up SIP aims to build a higher corpus required to offset lifestyle inflation and also to deploy increased savings that accrue with rising income. What should you check?
The idea to get more out of the traditional SIP is always appealing. Omkeshwar Singh, head, RankMF, said, “Over five to seven years, investors can get excess returns of 2 to 4 percent per annum over that of traditional SIPs, if they opt for a smart SIP.”

But all these arrangements need to be looked into in detail. Many of these distributors do not register these arrangements as ‘SIP’ with the respective fund house. They are carried out as a chain of lump-sum investments into respective schemes. If the fund house for any reason decides to restrict inflows into the scheme and allows only investments in an SIP, investors in such plans will not be able to continue with their SIPs.

Investors have to check the choice of schemes available. While RankMF allows SmartSIP with many schemes with a minimum three years of track record, FundsIndia works with ICICI Prudential AMC and offers one scheme each in active and passive equity funds. It has plans to extend the facility to other schemes it recommends. Step-up SIPs are allowed in most schemes, unless specifically stated otherwise.

Keep in mind that the scheme chosen for such value-added SIP may not fit your risk appetite or your time frame.

If the allocation to the equity fund is going to change each month—which can range between 10 percent and 300 percent of the SIP amount—then it is better to know how the sum gets deployed and how much money actually moves from your bank account. In most cases, the SIP amount is fixed, but if there is a provision to deduct more than the fixed amount you agreed on, then you have to maintain the required balance in your bank account.

In the case of step-up SIPs, remember the month in which you have agreed to raise your SIP amount and fund your bank account accordingly. “Most investors are not comfortable in giving a prior commitment to increase their SIP amount in future as there may not be clarity on income, saving, risk-taking ability, cash flow needs and financial goals in future. Hence, we allow investors to step up their SIP as and when they want, instead of asking them for prior commitments. We simply register a separate SIP for the incremental sum in our system backend,” said Nirav Karkera, head of research, Fisdom, an online mutual fund distributor.

RankMF also books profit by switching one-third of the units of equity funds held in a rule-based manner into units of liquid fund when the markets are overheated, as per their in-house valuation model. This money gets redeployed into equity funds when the markets fall and become attractive. While this sounds good, there is a tax liability involved in all these transactions and you have to account for it.

What should you do?

It is normal to seek some extra return or to cut down the risk, but investors have to take a measured approach.

Even the value-focused arrangements are not perpetual winners. At times equity markets turn frothy but remain at higher levels for a prolonged period. In such times, your value SIP would immediately cut down your SIP contribution to equity funds. But your investment underperforms a traditional SIP because markets have a mind of their own. “Many investors as well as distributors find it difficult to digest this underperformance,” said Singh.

A senior official with a mutual fund house, who asked not to be identified, said that even distributors are not keen to market these products because it affects the predictability of their commission income as investments in liquid funds earn almost nothing.

However, Arun Kumar, head of research, FundsIndia.com, has a combination approach. “Staying invested for around seven years help you to get the best out of an SIP in an equity fund. We have figured out that a combination of traditional SIP (70 percent) and Power SIP (30 percent) works the best from a behavioural standpoint. In good times the traditional SIP does well and in tough times Power SIP does well, effectively making sure that the investor stays invested through the tenure of the SIP,” he said.

While there are many fans of these innovations around SIPs, there are many dissenting voices too. “We do not offer any special SIP. We believe an SIP is a powerful and simple solution for investors. We do not see any value in back-tested-driven alternate SIP solutions which only complicate things for investors,” said Gaurav Rastogi, CEO, Kuvera, an online wealth management firm.

Ravi Kumar TV, founder of Gaining Ground Investment Services, said, “Most investors have budgeted how much they can invest in equity funds. Further complications in SIP under the guise of making it smart can confuse investors. It is better to use traditional SIP for long-term, disciplined investments in equity funds.”

While these value-added SIPs are the same as their traditional counterparts when it comes to features such as registration, cancellation and pause, they underline one common theme—the need for long-term investing in equity funds for wealth creation.