There are different ways to invest in mutual fund schemes like a one-time investment called LUMSUM, SIP or Systematic investment plan where a predefined amount is get invested on a predefined date form your bank account.

What is SIP?

Among all the options available, the most popular among retail investors is SIP, a Systematic investment plan. In this investment approach, the periodical transfer of a fixed amount takes place on a pre-specified date from your bank account to your specified mutual fund scheme account(Folio No).

As the popularity of SIP among investors has increased owing to lower volatility in sip return, there are a lot of new features that have been added to enhance the return through the SIP investment. I am sharing my take about the features available from different mutual companies like HDFC MF or SBI MF and their pros and cons.

Ways to enhance SIP return

In general, SIPs will have a fixed installment amount invested throughout the chosen period either in Equity mutual funds or Debt Mutual funds. For example, Rs 5000/- monthly SIP for a 5-year period will invest Rs 5000/- per month for 60 months time period.

You will be able to benefit from a scenario if the SIP amount increases when the market is down to benefit from a lower valuation of stocks. 

FLEX SIP

The method used to calculate the installment amount as follows

• Start with an initial SIP amount say X.
• The time period can be any of the following time periods 3/5/10/15/20 years selected by the investor.
• The subsequent SIP installment is governed by the following formula

Higher of the following two amounts

•  Fixed SIP amount OR
• (Fixed amount * No of installment including current one) – (Market value of installments prior to 2 days of SIP installment due)  

Let’s understand:

Suppose you are investing Rs 5000/- monthly SIP for a period of 5 years debiting from your account on the 15^th of every month. 

To calculate the amount for the 13^th SIP installment the calculation will be like this.

Fixed amount – Rs 5000/-

 OR

(5000 * 13) – (Market value of 12 SIP installments on 13^th date of 13 months)

Higher of above two amounts subject to a maximum of 2X (twice of SIP amount) will be invested.

The idea here is to invest an additional amount over and above your regular SIP installment amount whenever the market is down to leverage the low-cost advantage. Currently HDFC Mutual and Nippon Mutual Fund are offering this facility.

Others like Kotak Flex SIP, The SIP amount is governed by the NIFTY PE (price to earnings) multiple. An investor can specify an additional amount that could be invested when market PE is low. The threshold for additional investment is PE = 15 or less.

When the Market (NIFTY) PE is less than 15 the additional amount will be invested for SIP otherwise Fixed amount as specified.

In my opinion, a Variable amount based upon the valuation of previous investment makes a greater impact on SIP return. This method takes care of day to day volatility.  Whereas the MARKET movement takes a much longer time to reflect in deciding the variable amount. Market multiple movements are slow due to market size and a large number of participants. Therefore it may not capture interim volatility. 

Pre-determined increment

This is a method to increase investment corpus along with our incremental income in process of time. These are called SIP TOP-UP or STEP UP.

Enhancement in the contribution can be mandated in the initial SIP application or later through an online or physical application. The increment can be a fixed amount or fixed percentage of the initial SIP amount as mandated by the investor at different time intervals. The benefit of the scheme is accumulating in your already selected schemes without worrying about adding new schemes.

The idea in this type of increment is that your savings will increase with time and your earning.  

The purpose is an additional contribution over and above your regular contribution which will result in a higher maturity corpus. Currently, all the Mutual fund players are having these features like SBI MUTUAL FUND, ICICI MUTUAL FUND, UTI MUTUAL FUND, etc

Play and Pause installment for better SIP return

You are in driving seats in these options of SIPs. The starting and stopping of SIP are in investor’s hands. These options work better for informed investors who have spent time in the market and understand market dynamics.

It is like timing the market when you think the market is expensive, you can pause the investment for some time and vice versa. In my opinion, this option is avoidable as the timing of the market is very difficult and most of the time investors make mistakes.

Conclusion

These options add more characteristics to your SIP investments. I love to hear your feedback. Shubhwealth.com