Topic 3: Flexi-SIP Gets Maximum Out of Your Investment
Investment amount varies every month or quarter depending on the direction of the market.
Systematic investment plans (SIPs) have been one of the most popular vehicles to invest in mutual funds for quite some time now. With its popularity on the rise, fund houses also came up with new ways to invest through SIPs, starting with equity funds and then moving on to investment in debt funds. And among the fund houses that aimed at stable funds inflow went on an overdrive to get their investors invest through SIPs.
Of late, fund houses, driven by different investor needs, have started exploring new avenues. One such option is where an investor can increase or cut down on the amount he or she invests in a mutual fund scheme each month or quarter. While popularly this is called a flexi-SIP, the underlying principles are that of a tool first proposed by Michael Edelson, a Harvard University professor. The process is called averaging. Although the original process is based on mathematical models, there are some easy-to-use investment tools that are available with fund houses and financial advisors who can help you invest through this method.
Under this method, as an investor you would need to invest in such a way that the total value of your portfolio would go up by a pre-fixed amount. And the increase would be regardless of how the market moves. So, when the market is rising your investment each month (or quarter) would be lesser than the previous month, while when the market is in a declining phase, your investments each month would be rising. Under the value averaging method, the size of your regular investments would be inversely proportional to the direction of the market. Theoretically, financial advisors say, there could also come a month or two when to stick to the rules, you may also need to withdraw some amount from your accumulated funds. One of the main differences between SIP and flexi-SIP is that in flexi-SIP you also need to incorporate a rate of return on your portfolio that you wish to have in the long run. This rate of return is completely left to the market forces in case of regular SIP. For example, in SIP when you invest say Rs.5000 or Rs. 10,000 every month (or quarter), you don’t look at how much return it generates at the end of your chosen period. However, in case of flexi-SIP you target some rate of return, say 10% at the end of each period. So, if at some period, because the market was good, and the rate of return is higher than the target rate of 10%, the next period you would invest a bit less than what you had invested. Similarly, in case of periods when the actual return was lower than your target return, you would increase the amount to be invested during the next period.
To start a flexi-SIP in your mutual fund, you need to zero down on a benchmark amount to be invested, say Rs.5000, Rs. 10,000 or whatever. This would work as the post, and the monthly amount that you invest, although varying, would be done in relation to this benchmark. You should set some maximum amount that you can afford to invest every month. On the other hand, the minimum investment amount would be nil. And then you need to fix expected rate of return. Here, you should be practical and should neither set the rate at too high a level or at a rate which is too low. Here again, if you are not trained in fixing the rates, your financial planner or advisor could be of help. Historically, it has been observed that executed properly, over the long run, the flexi-SIP method can give you a return that is higher by 1.5-2% than the regular SIP return for the same period. Analyses with historical data have also shown that flexi-SIP method also gives a superior return over investments made in a lump sum.
Source: UTI Swatantra
Systematic investment plans (SIPs) have been one of the most popular vehicles to invest in mutual funds for quite some time now. With its popularity on the rise, fund houses also came up with new ways to invest through SIPs, starting with equity funds and then moving on to investment in debt funds. And among the fund houses that aimed at stable funds inflow went on an overdrive to get their investors invest through SIPs.
Of late, fund houses, driven by different investor needs, have started exploring new avenues. One such option is where an investor can increase or cut down on the amount he or she invests in a mutual fund scheme each month or quarter. While popularly this is called a flexi-SIP, the underlying principles are that of a tool first proposed by Michael Edelson, a Harvard University professor. The process is called averaging. Although the original process is based on mathematical models, there are some easy-to-use investment tools that are available with fund houses and financial advisors who can help you invest through this method.
Under this method, as an investor you would need to invest in such a way that the total value of your portfolio would go up by a pre-fixed amount. And the increase would be regardless of how the market moves. So, when the market is rising your investment each month (or quarter) would be lesser than the previous month, while when the market is in a declining phase, your investments each month would be rising. Under the value averaging method, the size of your regular investments would be inversely proportional to the direction of the market. Theoretically, financial advisors say, there could also come a month or two when to stick to the rules, you may also need to withdraw some amount from your accumulated funds. One of the main differences between SIP and flexi-SIP is that in flexi-SIP you also need to incorporate a rate of return on your portfolio that you wish to have in the long run. This rate of return is completely left to the market forces in case of regular SIP. For example, in SIP when you invest say Rs.5000 or Rs. 10,000 every month (or quarter), you don’t look at how much return it generates at the end of your chosen period. However, in case of flexi-SIP you target some rate of return, say 10% at the end of each period. So, if at some period, because the market was good, and the rate of return is higher than the target rate of 10%, the next period you would invest a bit less than what you had invested. Similarly, in case of periods when the actual return was lower than your target return, you would increase the amount to be invested during the next period.
To start a flexi-SIP in your mutual fund, you need to zero down on a benchmark amount to be invested, say Rs.5000, Rs. 10,000 or whatever. This would work as the post, and the monthly amount that you invest, although varying, would be done in relation to this benchmark. You should set some maximum amount that you can afford to invest every month. On the other hand, the minimum investment amount would be nil. And then you need to fix expected rate of return. Here, you should be practical and should neither set the rate at too high a level or at a rate which is too low. Here again, if you are not trained in fixing the rates, your financial planner or advisor could be of help. Historically, it has been observed that executed properly, over the long run, the flexi-SIP method can give you a return that is higher by 1.5-2% than the regular SIP return for the same period. Analyses with historical data have also shown that flexi-SIP method also gives a superior return over investments made in a lump sum.
Source: UTI Swatantra