Investing Smarter: The Rise of Smart SIPs in a Traditional SIP World

You’re familiar with a regular SIP if you’re a mutual fund investor. You invest a fixed amount each month on a set date, with minimal ongoing management. While this tried-and-true investment strategy guarantees consistency, it may miss out on market opportunities.

Think of a smarter and more complicated version of vanilla SIPs with a dynamic feature that responds to market conditions. That’s what we call Smart SIPs, which adjust investment amounts using a variety of sophisticated algorithms. The goal is to maximize returns by capitalizing on market fluctuations.

Although it may surprise you, it is true.

We’ve created an article about Smart SIPs for smart investors like you. This article explains the fundamental concepts of Smart SIPs, including how they work, how they differ from regular SIPs, and much more. So let’s tune in.

What are SIPs, and how do they work?

A Systematic Investment Plan (SIP) is a method of making a fixed contribution at a pre-determined frequency (monthly/quarterly) in a mutual fund. It’s like creating a financial fitness routine for your money. This is how it works.

Regular Contributions: When you set up a SIP, a fixed amount is deducted from your account each month (or at your preferred frequency). This amount is then invested in a mutual fund of your choosing.

Rupee Cost Averaging: SIPs save you from the stress of timing the market. The mutual fund price will fluctuate from month to month. Your investments accumulate over time, allowing you to benefit from an average cost. This approach is commonly referred to as rupee cost averaging.

What are Smart SIPs, and how do they work?

Smart SIPs are an innovative investing technique in which the SIP amount varies based on market valuations. The guiding principle in Smart SIPs is to Buy Low and Sell High.

Smart SIPs, also known as Flexi SIPs, are automated decisions that use a complex algorithm to calculate the SIP amount by evaluating valuation indicators such as market levels, P/E ratio, P/B ratio, PEG, and other factors.

When you start your Smart amount, you choose the base amount. The base amount (or your SIP amount) is adjusted based on current market sentiments and valuations.

When valuations are low, double the base amount is invested. When the valuations are neutral, the base amount is invested. As valuations rise, the base amount is halved, temporarily invested in liquid funds, or not invested. 

Comparing Smart SIPs and Normal SIPs

Aspect	Normal SIPs	Smart SIPs
Investment Strategy	Set-and-forget approach. Fixed investment amount in a mutual fund regularly (usually monthly).	Dynamic and automated strategy. Investment amount or frequency adjusts based on market conditions.
Risk Management	Conservative to aggressive options available. You have control over fund selection.	Less control. Adjustments based on market conditions. Potential for higher returns but not guaranteed.
Potential for Returns	Consistent, but may miss market opportunities. Rupee-cost averaging can be profitable.	Higher returns are possible due to dynamic adjustments. However, additional fees may apply.
Fees	Standard expense ratio. No additional fees.	May incur higher fees due to active management and real-time adjustments.

Example of Smart SIPs vs Regular SIPs

Let us use an example to illustrate this concept better.

Months	Market Level (in Rs.)	Regular SIP (amount invested in Rs.)	Regular SIP Units Bought	Smart SIP amount invested (in Rs.)	Smart SIP  Units Bought
1	50,000	10,000	200.000	10,000	200.000
2	52,000	10,000	192.308	10,000	192.308
3	51,000	10,000	196.078	20,000	392.157
4	49,000	10,000	204.082	20,000	408.163
5	47,000	10,000	212.766	20,000	425.532
6	48,000	10,000	208.333	20,000	416.667
7	50,000	10,000	200.000	10,000	200.000
8	52,000	10,000	192.308	10,000	192.308
9	53,000	10,000	188.679	5,000	94.340
10	54,000	10,000	185.185	5,000	92.593
11	55,000	10,000	181.818	5,000	90.909
12	53,000	10,000	188.679	5,000	94.30

Now, let’s do the check:

	Regular SIP	Smart SIP
Total Units Bought	2,370.443	2,379.070
Total Investment	1,20,000	1,40,000
Final Value (Assuming NAV at the end to be 55,000)	1,30,000	1,41,950

Smart SIP led to approximately ₹11,950 higher gains than traditional SIP. However, it is interesting to note that a larger total amount was invested in the case of Smart SIP.

When deciding between these options, consider their risk tolerance and the market outlook.

Benefits of Smart SIPs

Market-Responsive Investing: Smart SIPs adjust equity investments based on market valuations. The equity allocation is done based on two parameters:

1. market trends and sentiments, and

2. technical valuation indicators like the P/E ratio. 

So, to reduce risk during overvalued periods, only a portion of your SIP amount goes into equities or is invested in less volatile vehicles, reducing risk during overvalued periods.

Potential for Better Returns: Smart SIPs aim to optimize returns by capitalizing on market fluctuations. During market downturns, they acquire more assets, potentially boosting overall performance. In addition to rupee-cost averaging, Smart SIPs also do value averaging.

Disciplined Approach: Like traditional SIPs, Smart SIPs encourage regular investing, promote discipline, and harness the power of compounding. They also eliminate emotions from the decision-making process.

Drawbacks of Smart SIPs

• Algorithm Dependency: Smart SIPs rely on algorithms to determine investment amounts. While this can be advantageous, it also means trusting the algorithm’s accuracy.
• Market Timing Risk: If the algorithm misjudges market conditions, you might miss out on potential gains during bullish phases.
• Higher Fees: Some Smart SIPs may charge higher fees due to their dynamic investment approach and frequent reallocations.

Who Should Consider Investing in Smart SIPs?

Smart Systematic Investment Plans (SIPs) are well-suited for you if:

• You are tech-savvy and are comfortable with automated AI-driven investment strategies.

• You are a long-term planner and committed to consistent, disciplined investing.

• You are high-risk tolerant and are willing to navigate market fluctuations.

• You are comfortable investing higher amounts when the market dips, and the variable SIPs don’t spoil your budget.

The Bottom Line 

Smart SIPs could be a useful tool for investors with a long-term outlook and a tolerance for higher risk. With data-driven and automated algorithms to assess whether markets are inflated, flat, or expensive, your SIP amount differs each month. Your equity allocation also changes depending on the market trends.

Traditional SIPs, on the other hand, are still a reliable and tried-and-true strategy for those who prefer a simpler, more hands-off approach. Encourages disciplined investing when you know how much you’re going to invest each month.

If you want to accumulate wealth over time without actively participating in the market, regular SIPs are better suited to your needs.

To be on the safe side, consult with an experienced financial advisor to determine which approach is most fitting for your specific financial goals. 

*Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as recommendation or investment advice by Research & Ranking. We will not be liable for any losses that may occur. Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL, and certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.

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