Talk to any financial advisor about equity investing and he is bound to recommend systematic investment plans (SIPs) to you. This is because it is extremely difficult for a lay investor to decide when to enter or exit the market, as the market generally sways to a host of factors ranging from international to domestic or even politics.
The biggest advantage of SIP is that it removes the element of timing. You continue to invest small amounts over a long period of time, say, 5-10 years and you do not have to worry and the element of volatility is taken care of. SIPs give you the benefit of compounding and averaging your investments.
In short, SIPs help you average your investments and remove the element of market timing. So when the market falls, you get a higher number of units, while when the market rises, you get a lesser number of units. Most fund houses specify dates of the month, which you can choose for your SIP investments. So once you have selected the scheme and the amount to invest, you could start your SIP. You can either write post-dated cheques, or, if that is tedious, you can opt for an ECS mandate wherein an amount is deducted every month from your bank account. Investment planners recommend that to get the benefits of SIP, you should invest for longer periods of time typically 5-10 years. However, of late, there are a number of ways in which you can do a SIP. While traditionally you could do SIPs only in mutual funds, today there are different ways in which you can buy stocks of your choice with the help of SIPs, or even exchange traded funds (ETFs). While the traditional way of doing a SIP was once a month, today you can do a SIP daily, weekly, fortnightly or even quarterly. Some fund houses also allow you to do a value SIP or STP, or a flexi SIP. Then, there are portals that offer you alert SIPs. As an investor what are the options available to you and how do you choose them?
MONTHLY SIP
This is the most traditional way of doing a SIP in an equity mutual fund. This works well most for salaried people, who get a monthly cash flow. Investors tend to opt for a date between the 1st and 10th of the month, since most of us get salaries at the end of the month. Most investors tend to avoid the last 10 days of the month, on fear of exhausting their surplus money and not being able to meet their SIP commitment.
DAILY SIP
Compared to your money which goes in on a monthly basis as in a traditional investment, here money goes daily into the fund. Of late, some mutual funds have started offering a daily SIP. Essentially, these products are meant for small traders or for the micro segment, he explains. However, not everyone is a fan of daily SIP. Daily SIP is an overkill and not really needed. Though it makes averaging consistent, it is cumbersome.
FLEXI-SIP
Traditional SIPs allow you to invest only a fixed amount every month or daily. However, a flexi SIP enables investors to set up a range of amounts for the SIP investments and be flexible about how much they want to invest every month. It is not available in the conventional mode through mutual funds. It is offered by portals like fundsindia.com. We received several queries from investors on how they can modify their SIP payment if they want to – what to do if they want to reduce or increase the SIP amount. Besides this, there are investors who are unsure about how much they can save every month. It is very difficult to alter your SIP using traditional methods. For a particular SIP, the amount or the date just cannot be changed. Technically, an ECS mandate is registered for a particular bank account for debiting a specific amount on a fixed date every month. If any of these three change, one would have to stop and re-do the SIP. This is what has led to the concept of flexi SIP. Using this facility, an investor can choose a range from 1,000 to 10,000 per month and depending on his or her cash flow, invest that amount every month. However, experts caution retail investors, who do not have an understanding of market dynamics against timing the market. It is a fund manager's job and he is consistently doing it.
SIP TOP-UP
HDFC Mutual Fund offers a SIP Top-Up. Here an investor who wishes to enrol for SIP, has an option to increase the amount of the SIP instalment by a fixed amount at pre-defined intervals. The SIP top-up amount should be filled in the enrolment form itself. So, you choose to invest 2,000 for the first six months and then prefer to invest 5,000 per month.
VALUE AVERAGING PLAN
This is offered by some mutual funds such as Benchmark and portals like fundsindia.com. It is a strategy that uses mathematics and algorithms. It works like SIP in terms of steady monthly contributions, but differs with regard to monthly contribution. Here the investor, sets a target growth rate or amount on his or her asset base or portfolio each month, and then adjusts the subsequent month's contribution according to the relative gain or shortfall made on the original asset base. Suppose you want to add 1,000 added to your equity mutual fund every month and you start with investing 1,000. Now at the end of first month the value of your fund becomes 1,200. So now you need to invest only 800 (1000-200) to make the investment worth 2,000. In the following month, the value of investment reduces to 1,900 due to correction in the market, so you need to invest 1,100 (3,000-1,900) so that the amount touches the target amount of 3,000. In other words, you buy more (units) when the prices are low and you end up investing less (buying less units) when the markets peak.
HOW SHOULD YOU CHOOSE
Financial planners feel that the most important thing is to go ahead and start a SIP first. Keep things simple. There are no proven scientific benefits of a flexi SIP. Even a monthly SIP is as good as any other investment. The type of SIP, does not matter but the period does matter. He asks investors to invest in SIPs for at least five years to reap the benefits. Most retail investors do not have the time and energy to monitor and track complex methods of SIP investments. "If you are a long-term investor who invests in line with your asset allocation and have a time horizon of 5-7 years, keep things simple and go with a traditional monthly SIP.
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