New Delhi: Nowadays many people are opting for smart SIP to invest in mutual funds. It changes your investment according to the market. With this you are expected to get more profits. But, this does not always apply. What is Smart SIP, how does it work and does it always give higher returns? Come, let us understand every aspect related to it here. SIP i.e. Systematic Investment Plan is a method where you invest a fixed amount every month in a mutual fund. But, in Smart SIP this amount keeps changing according to the market conditions.
According to Gautam Kalia of Sharekhan, Smart SIP has been designed to improve returns keeping in mind the market conditions.
The Economic Times quoted Soumya Sarkar, co-founder of Wealth Redefine, as saying that unlike regular SIPs, smart SIPs increase contributions during market downturns. At the same time, it reduces during market boom.
Anand K Rathi, co-founder of MIRA Money, says that smart SIP works by adjusting the investment amount based on market valuations. It follows a simple strategy of buying low and selling high.
When and how is investment done?
When stock market valuations are right it usually makes sense to invest your monthly SIP amount in equity mutual funds. This doubles your monthly SIP amount when the market is at relatively low valuations. When the market is expensive it makes sense to invest your money in equity schemes. The money is then put into a liquid fund. It books profits by selling a portion of your mutual fund units when the market is too expensive. However, there is no guarantee that Smart SIP will always deliver better returns. Sometimes it can also be the opposite.
Rathi says smart SIPs work better in specific market cycles. In a bullish market, returns from Smart SIP may be lower than regular SIP as the investment amount reduces when market valuations increase.
However, smart SIPs can shine in a bear market. With a fall in the market, they can invest more. This possibility of higher returns can optimize your investment strategy, especially in bear markets.
can understand from example
Sameer Shah, Head of Online Business, Axis Securities, explains Smart SIP using an example. Let us assume that someone invests Rs 5,000 through regular SIP on the 5th of every month. Irrespective of market conditions, his investment remains constant at Rs 5,000 every month. On the contrary, the other person uses Smart SIP. He plans to invest Rs 5,000 in Smart SIP when market valuation is neutral. If the market is bullish he will invest only half of the amount (Rs 2,500). If there is a decline in the market then he invests double the original SIP amount (Rs 10,000). This strategy will help them take advantage of the market momentum. He buys more units during market decline. He invests less during market boom.
How does a fund house know when to reduce or double the SIP amount?
Each fund house has its own internal valuation matrix, says Nitin Rao of Epsilon Money. Through this he decides whether the market is cheap, neutral or expensive. The same model is used for Smart SIP.
Can Smart SIP give higher returns than regular SIP?
According to Anand Rathi, if we consider a long-term cycle like 2011 to 2021 then the difference in returns between smart SIP and regular SIP could be around 1.5%. Smart SIPs perform slightly better by 1-1.5%.
Now let us assume that you invest Rs 5,000 every month in a regular equity large-cap SIP. Assuming it gave 12% returns then you would get Rs 11,20,179 in 10 years, Rs 23,79,675 in 15 years, Rs 45,99,287 in 20 years and Rs 85,01,033 in 25 years.
If you choose Smart SIP then you can get 1.5% more returns than regular SIP. That 1.5% extra return will look like a good return when you invest for the long term. At 13.5% per annum return, you will get Rs 12,13,555 in 10 years, Rs 27,06,657 in 15 years, Rs 55,19,003 in 20 years and Rs 1,08,16,222 in 25 years. Thus, by not choosing smart SIP, you may lose Rs 9.19 lakh in 20 years and Rs 23.15 lakh in 25 years.
Smart SIP of Rs 5,000 per month can give Rs 23.15 lakh more returns than regular SIP
SIP Amount (Rs.)Year12% SIP Return (Rs.)13.5% SIP Return (Rs.)Loss on not choosing Smart SIP (Rs.)5,0001011,20,17912,13,55593,3765,0001523,79, 67527,06,6573,26,9825,0002045,99,28755,19,0039,19,7165,0002585,01,0331,08,16,22223,15,189