Use SIP variants to build wealth in tactical manner

The popularity of Systematic Investment Plan or SIP has seen a tremendous uptick in recent period with about 2.49 crore active SIP-accounts coupled with total inflow of Rs 7,985 crore during October 2018. The mutual fund industry has clocked a staggering inflow in recent times, with total Asset Under Management (AUM) of Rs 22.23 lakh crore as on October 2018.

The attainment of maturity and understating among investors about MF and its tools has also seen a paradigm shift in its offering, which goes beyond regular SIP. A different variant within SIPs have also helped to increase efficiency to build wealth with much convenience.

To keep emotions of fear and greed away from investment, SIP has emerged as a boon for investors, particularly for those with limited understanding of markets. Investors can give standing instructions to debit money from their bank account irrespective of those emotions. The investible amount can be as low as Rs 500 per month, which provides greater reach across demographic along with discipline of regular investment.

However, given the dynamics in investing as well as in stock markets, there is a need to go beyond regular SIP. Few fund houses are providing proprietary models of investing similar to SIP. Following are variants of SIP which are relatively more effective than regular mode:

Top-up SIP 

This is one of the basic variants of SIP, which is helpful for those who expect to have surplus cash flow in future. As incomes of investors go up, savings portion also goes up in an equal portion, which can be used for SIP top-up. This helps to build substantial wealth in the long run, as compared to constant fixed amount. Suppose one starts a SIP of Rs 1,000 and commits to top-up every year by Rs 1,000 over 25 years, then by the end of the tenure it will accumulate about Rs 54.78 lakh, against Rs 27.57 lakh in a normal fixed SIP.

Value SIP 

One missing element in normal SIP is that there is no value averaging, as a fixed sum is debited periodically irrespective of movement in Net Asset Value or any chosen variable. But in a value SIP, the amount deducted will vary on the basis of an underlying variable. It can be NAV movement or Price/Equity of the underlying benchmark.

For instance, if investment starts with Rs 1,000 every month and appreciates to Rs 1,500 by month end, than in next month it will deduct only Rs 500 as there is surplus which will be diverted to debt scheme or kept in same scheme. Similarly, when it depreciates to Rs 900, it will invest Rs 1,100 next month. By doing this, it helps the investor to earn extra alpha of 1-3% over a period of time.

Staggered SIP 

Another suitable variant of SIP for investors with surplus cash is staggered SIP, which can be done on any random period depending on availability of cash or foreseen opportunity in market. It typically follows a lumpsum approach, which is invested on periodic basis like SIP with variation in amount. However, investor should remain active as it is typically lumpsum investment where technically investor does additional purchase in existing investment. This helps to exploit the opportunity arising in market or scheme at any given period, which maximises returns and averages the cost of purchase.

MF tools such as SIPs and the variants have helped many retail investors to build meaningful wealth in a tactical manner with more efficiency than a traditional mode of investment. It has made availabile choices for investors depending on their needs. But it also demands a basic attention of investors to understand these variants and accordingly follow the one that suits their requirement.

HOW IT WORKS

• Use top-up SIP to increase the investment amounts in future
   
• Staggered SIP invests lumpsum amounts based on market opportunity 

The writer is founder and CEO, 5nance.com