Variable SIP: Interesting way of investing systematically in MF

Abhinav AngirishMany of you must have heard about SIP or Systematic Investment Plan, an easy and increasingly popular way of investing in mutual funds. Systematic Investment Plan (SIP) is an option where you invest a fixed amount in a mutual fund scheme at regular intervals. SIP is a disciplined investment plan that helps reduce negative impact of market fluctuations on portfolio. It is a convenient tool that not only helps you reduce volatility risk but also create significant wealth for you in the long run. With the help of SIP, you get more number of units when the markets are low and when the markets are high, you get less number of units, thereby averaging out the cost of units. Typically, all the equity investors want to buy mutual funds, stocks etc. when the markets are low. Many times you may have wished that the stock markets are always down when your SIP instalment is due, so that you get more number of units. Unfortunately, you have no control on that. Although systematic & disciplined investments plans like SIP can give benefit of rupee cost averaging to the investors in the market downturns. But still a conventional SIP does not give full benefits when markets are low since it does not allow you to invest more even when the markets are down and trading at attractive levels. Today we are introducing you to a new variant of SIP which is called as Variable SIP or Flexible SIP which can be helpful in such scenario. Variable SIP is a modified version of SIP which allows the investor to increase the SIP instalment amount during market downturns. Variable SIP enables him to invest more when markets are low and thus helps him achieve higher returns. It allows investors to take more advantage of lower markets by helping them invest more money, thus enabling them to further lower their cost of purchase.Variable SIP is specifically designed to benefit more from market downturns. In a falling market scenario, a higher sum is automatically invested to get more units. On the other hand, at other times, the pre-decided (regular) instalment amount gets invested. This plan leads to higher returns compared to a conventional SIP. Like in a conventional SIP, in a variable SIP too, you decide the tenure and the regular amount. In additional to that, you can also fix maximum instalment amount at the time of starting variable SIP.Calculation of Variable SIP amount:Under the Variable SIP, the investors are eligible to invest fixed (regular) amount to be invested per installment OR the amount as determined by the formula whichever is higher.Therefore, VSIP amount = Fixed (regular) installment amount OR(Number of installments including the current installment X fixed amount to be invested per installment) - market value of the investments through variable SIP till now Whichever amount is higher of the two, is taken to be invested as Variable SIP instalment. Illustration of the difference between Conventional SIP and Variable SIP: *This figure is for illustration purpose only and is used to keep the total investment amount equal in Conventional SIP and Variable SIP for comparison.Disclaimer: The above illustration is merely indicative in nature and uses assumed figures. It should not be construed as an investment advice. As seen in the above example by investing through Variable SIP, you end up with lower net average cost per unit as compared to regular SIP.Advantages of Variable SIP (VSIP) No need to time markets. Using Variable SIP, you are able to automatically invest higher amount when equity markets are down and invest regular amount at other times. Similar to Regular SIP, It also makes you enjoy the benefit of power of compounding and rupee cost averaging. It helps you to take advantage of bearish phases in the market. Therefore with Variable SIP you are able to lower your average cost and buy more number of units with same investment amount.Disadvantages of Variable SIP (VSIP) As against regular SIP, in Variable SIP the monthly investment amount can vary, so investor need to maintain a higher bank balance. Thus, under Variable SIP, a higher amount is invested automatically when the markets are low while regular amount is invested at other times thereby helping the investor benefit from market downturns. This strategy leads to better returns as compared to conventional SIP. It is always recommended by investment experts to invest more when the markets are low but to really practice it becomes difficult. By using Variable SIP one can actually achieve this effortlessly without keeping any significant track of the markets. Author is managing director of investonline.in, a mutual fund distribution entity.