Smart SIP

Smart SIP is a modern investment approach from selected asset management firms and distributors. It leverages market conditions to allocate funds effectively.
EXPLORE FUNDS
Smart SIP
EXPLORE FUNDS
3 min
13-June-2024

A smart SIP is a type of systematic investment plan (SIP) that adjusts the amount and frequency of your investments in mutual funds based on the market conditions. It aims to maximise your returns by buying more units when the market is low and selling some units when the market is high. In this article, you will learn about the meaning, features, benefits, and differences of smart SIPs compared to regular SIPs, and how to choose the best smart SIP for your financial goals.

What is a Smart SIP?

Smart SIP embodies an intelligent investment approach where fund units are dynamically bought or sold to mitigate market risks, aiming to enhance profits by discerning optimal investment opportunities grounded in market trends, historical data, and additional factors.

Key principle of Smart SIP: "Buy Low and Sell High"

  • Equities are acquired during market phases of fair pricing and divested when prices are advantageous.
  • Conversely, during equity asset overvaluation, allocating to debt-based SIPs diminishes risk exposure.

Leveraging technology and data analytics, Smart SIP streamlines the investment process, optimising decision-making and outcomes.

How does a smart SIPs work?

  • A smart SIP works by following the rule of buying low and selling high. When the market is fairly valued, it invests your monthly SIP amount in equity mutual funds. When the market is very undervalued, it doubles your monthly SIP amount in equity mutual funds. When the market is expensive, it skips your investment in equity schemes and parks the SIP amount in liquid schemes. When the market is very expensive, it books profits by selling a part of your existing equity units and invests the proceeds and the monthly instalments in liquid schemes.
  • A smart SIP works with your consent. You will receive a notification from the fund house or the platform when a switch is required between equity and liquid schemes. You can either accept or reject the switch, or modify the amount of the switch.
  • A smart SIP works with any mutual fund scheme that you choose, as long as it is a growth option. You can select the scheme based on your risk appetite, investment horizon, and return expectations.

Features of smart SIPs

Here are some key features of smart SIPs:

  • A smart SIP uses a dynamic allocation strategy that switches between equity and liquid schemes based on the margin of safety index (MosDex). MosDex is a tool that measures the valuation and attractiveness of the market based on various factors.
  • A smart SIP allows you to set the minimum and maximum amount of your monthly instalments, as well as the default amount. If you do not specify these options, the fund will consider the default smart SIP amount.
  • A smart SIP is applicable only for the growth option of mutual funds, and not for the dividend option. This means that you will not receive any periodic pay-outs from your investments, but only the appreciation in the value of your units.
  • A smart SIP is also available for systematic transfer plan (STP), which is a method of transferring funds from one scheme to another within the same fund house. You can use smart STP to move your money from liquid to equity schemes or vice versa, depending on the market situation.

Benefits of smart SIPs

Listed below are some benefits of smart SIPS;

  • A smart SIP helps you to enhance your returns by taking advantage of the market fluctuations and investing more when the prices are low and less when the prices are high.
  • A smart SIP helps you to reduce your risk by diversifying your portfolio between equity and liquid schemes, and avoiding overexposure to either of them.
  • A smart SIP helps you to save your time and effort by automating the process of switching between schemes based on a scientific and objective tool like MosDex. You do not have to worry about timing the market or tracking the performance of your investments constantly.
  • A smart SIP helps you to maintain your discipline by investing regularly and systematically, regardless of the market conditions. You can also benefit from the power of compounding and the law of averaging by staying invested for the long term.

SIP vs. Smart SIP: How do they differ?

  • An SIP is a fixed investment plan, where you invest a fixed amount in a mutual fund scheme at regular intervals, usually monthly. A smart SIP is a variable investment plan, where the amount and frequency of your investments vary based on the market conditions. It is important to note that the SIP frequency is generally monthly/quarterly.
  • An SIP is a passive investment plan, where you do not change your investment strategy or amount based on the market movements. A smart SIP is an active investment plan, where you switch between equity and liquid schemes based on the market valuation and attractiveness.
  • An SIP is a simple investment plan, where you only need to choose a mutual fund scheme and an SIP amount, and start investing. A smart SIP is a complex investment plan, where you need to set the minimum, maximum, and default SIP amounts, and give your consent for switching between schemes.

Who should consider putting money through smart SIPs?

Certain investors comfortable with a more automated and potentially higher-yield approach, while understanding the associated risks and complexities, may find smart SIPs suitable. Those who may benefit from a prudent SIP strategy include:

  • Investors preferring a dynamic and automated investment method: Smart SIPs utilise algorithms to adjust investment frequency or amount based on market conditions, appealing to individuals seeking a hands-off approach and believing in market timing for enhanced returns.
  • Those aiming to time the market for increased profits: The core concept of smart SIPs involves acquiring more units during market downturns and fewer during upswings. While this strategy doesn't guarantee superior performance over traditional SIPs, it entails additional risks.
  • Individuals with extended investment horizons and higher risk tolerance: Due to their dynamic nature, smart SIPs may exhibit more volatility compared to regular SIPs. Investors willing to accept greater risk in pursuit of potentially higher gains may find this approach appealing, provided they maintain a long-term investment outlook to capitalize on the smart SIP strategy and navigate market fluctuations.

Should you opt for smart SIP?

A smart SIP is a smart investment plan, but it is not suitable for everyone. You should opt for smart SIPs if you:

  • Have a long-term investment horizon of at least 5 years or more, as smart SIP works best in the long run by capturing the market cycles and trends.
  • Have a moderate to high risk appetite, as smart SIP involves investing in equity schemes, which are subject to market volatility and uncertainty.
  • Have a flexible investment budget, as smart SIP requires you to invest more or less than your regular SIP amount, depending on the market situation.
  • Have a trust in the fund house or the platform that offers smart SIP, as smart SIP relies on their expertise and tool to decide when and how much to switch between schemes.

Things to look for before investing in a smart SIP

Before investing in a smart SIP, you should evaluate the following factors:

  • The performance of the mutual fund scheme that you choose for smart SIP, in terms of returns, risk, and consistency. You should compare mutual fund schemes with its benchmark and peers, and check its ratings and reviews.
  • The methodology of the tool that determines the market valuation and attractiveness, such as MosDex. You should understand the factors and parameters that the tool uses, and how reliable and accurate they are.
  • The charges and fees that are involved in a smart SIP, such as exit load, switching cost, and platform fee. You should compare the charges with the benefits, and see if they are worth paying.

Conclusion

While traditional SIPs offer a disciplined approach to investing, smart SIPs introduce an element of dynamism. By adjusting investments based on market conditions, they aim to potentially maximise returns. However, smart SIPs may involve a more complex strategy and potentially higher fees. Ultimately, the best choice depends on your investment goals and risk tolerance. If you are a seasoned investor comfortable with a more hands-on approach, a smart SIP could be a compelling option. For those seeking a simpler, set-it-and-forget-it approach, a traditional SIP might be the better fit. Regardless of your choice, remember, consistency is key to achieving your long-term financial goals.

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Frequently asked questions

How can I invest smartly in SIPs?

You can invest smartly in SIPs by choosing a plan that suits your risk appetite, investment horizon, and financial goals.

What is the difference between smart SIPs and smart SIPs+?

Smart SIPs and smart SIPs+ are different types of SIPs that use algorithms and data analysis to optimise the investment process. Smart SIPs+ are more flexible and dynamic than smart SIPs, as they allow you to change the basic and maximum amount, frequency, and duration of your SIP investment at any time.

Why is a mandate necessary for smart SIPs?

A mandate is necessary for smart SIPs because it authorises the fund house to debit a variable amount from your bank account depending on the market conditions.

If I can start regular SIP with Rs. 500, why should I have to have Rs. 5,000 for each instalment of smart SIPs?

You must have Rs. 5,000 for each instalment of smart SIPs because it is the minimum investment amount required by the fund house to implement the smart SIP strategy.

What happens if the mandate debit instruction is rejected, will smart SIPs stop?

If the mandate debit instruction is rejected, your smart SIPs will not stop, but you will miss the opportunity to invest in that particular month.

When will the money in my bank account be debited and how much?

The money in your bank account will be debited on the date you have chosen for your SIP investment, and the amount will vary depending on the market conditions and the smart SIP algorithm.

Is smart SIP good?

Smart SIPs can be good for potentially maximising returns by adjusting investments based on market conditions. However, they may involve higher fees and a more complex strategy.

What is a Normal SIP (Systematic Investment Plan)?

A normal SIP is a simple, disciplined way to invest a fixed amount of money regularly into a mutual fund, regardless of market fluctuations. It helps rupee-cost averaging and reduces investment risks.

Who should consider smart SIPs?

Smart SIPs may appeal to investors comfortable with an automated, potentially higher-return strategy, understanding the associated risks. Those favoring a hands-off approach, believing in market timing for increased returns, or possessing a longer investment horizon and higher risk tolerance might find smart SIPs suitable for their investment goals.

Why is the mandate necessary for smart SIP?

The mandate is essential for smart SIP to authorise automated adjustments in investment frequency or amount based on market conditions, ensuring adherence to the chosen investment strategy. This mandate empowers the algorithm to execute dynamic modifications, aligning investments with prevailing market dynamics and investor preferences.

How to choose between smart SIPs and normal SIPs?

Choosing between smart SIPs and normal SIPs requires considering factors such as investment goals, risk tolerance, and comfort with automation. Investors seeking a hands-off approach and believing in market timing might opt for Smart SIPs, while those preferring a steady, traditional investment approach may favor Normal SIPs for their simplicity and stability.

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The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

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