Systematic Investment Plan (SIP) is a method of investing where you set up a specific amount to be invested every month in a fund of your choice. Of course, by now, the SIP is no longer a novel concept, but has turned out to be the backbone of your investment plan. But apart from the plain vanilla SIP, is there any other way to make SIPs work better? There are!
Some AMCs and investment platforms offer what is known as Flexi-SIP. With this option, you can vary the monthly amount whenever required. This will be helpful where you cannot commit to a specific amount each month. This variant of SIPs gives you the flexibility to adjust your investments to changing needs. The amount could be entirely changeable or changeable within a range. If you do not make any changes, a default amount goes into your SIP anyway. But remember that with flexibility also comes the additional responsibility of staying in control.
There’s a type of SIP, called Step-up SIP, which steps up your investment periodically. You can choose to increase your monthly SIP amount every year by a certain amount or percentage. For example, say you had an SIP of Rs 5,000. You could choose to increase it by, say, 10% every year, or say, Rs 2,000 every year. This way, your savings and your wealth gradually increase without you making any additional effort. Taking the same example, an annual SIP increase of Rs 2,000 at an assumed rate of 12% works out to Rs 27 lakh in 10 years. If you had stuck with Rs 5,000 only, your accumulation would be Rs 11.6 lakh over the same period. So, you could still get the invest-and-forget benefit that a SIP offers.
The traditional SIP invests a fixed amount regardless of market direction. But if you want to get more mileage out of market ups and downs, there are some market-timing versions of SIPs available. Some AMCs, for example, tie your SIP amount with triggers such as the Nifty 50 PE levels. But such a system would result in different amounts being invested in different months.
The newest version of a market-timed SIP comes in the form of dynamic allocation between equity and debt within the fixed SIP amount. Such a SIP takes different parameters like valuations, market sentiment, growth outlook, etc, into account to determine the ideal allocation for that particular month. If the equity market is highly valued, you’d allocate lesser to equity and more to debt. Similarly, when markets are low, you’d allocate more to equity.
SIPs already help average cost. But if you let market fundamentals guide you, cost averaging becomes far more effective. In turn, this would give a further boost to returns, delivering more than a static SIP over the long term. So, while the SIP is a great tool for building wealth, a few tweaks can make it even more attractive!
The author is the Research Analyst, FundsIndia.com