Systematic Investment Plans (SIPs) have become a popular method of investing in mutual funds. They allow individuals to invest a fixed amount every month, making it easier to build wealth over time. But now, there is a new way of investing that’s gaining traction – Smart SIP. It claims to offer better returns by adjusting your monthly investments based on market conditions.
How does Smart SIP differ from the regular one? Does it really help you earn more? Let’s dive in and understand the differences and how Smart SIP can optimize your returns.
What is SIP and Smart SIP?
A regular SIP is a method where you invest a fixed amount into mutual funds every month, regardless of market conditions. Whether the stock market is up or down, the amount you invest remains the same.
Smart SIP, on the other hand, takes into account the state of the market. The amount you invest every month can increase or decrease depending on whether the market is in a bullish (rising) or bearish (falling) phase. The main idea behind Smart SIP is to help you buy more units when the market is low and fewer units when the market is high, following the classic strategy of “buying low, selling high.”
How Does Smart SIP Work?
In a regular SIP, if you invest Rs 5,000 every month, that remains constant regardless of market trends. But Smart SIP adjusts that amount based on how the market is performing.
For example:
- If the market is neutral (valuations are average), the Smart SIP will invest your chosen amount, say Rs 5,000.
- If the market is bearish (low valuations), it might double your investment to Rs 10,000, taking advantage of the lower prices.
- If the market is bullish (high valuations), Smart SIP may invest a lower amount, say Rs 2,500, to avoid buying at higher prices.
This flexibility allows Smart SIPs to optimize investments based on market cycles.
Example: How Smart SIP Works vs. Regular SIP
Sameer Shah, Head of Online Business at Axis Securities, explains the difference through an example. Suppose you invest Rs 5,000 every month in a regular SIP. This amount remains the same, irrespective of whether the market is high or low.
But with Smart SIP, your investment amount changes. If the market is rising, you may invest Rs 2,500 instead of Rs 5,000. If the market falls, you may invest Rs 10,000, allowing you to buy more units at lower prices.
Over time, this adjustment can lead to better overall returns, especially in volatile markets.
How Fund Houses Manage Smart SIP
Every fund house has its own internal valuation model to decide how much to invest based on market conditions. This valuation helps them determine whether the market is cheap, neutral, or expensive, and then adjust your monthly investment accordingly.
Nitin Rao of Epsilon Money says that these models use various financial metrics to ensure that Smart SIPs are aligned with market trends, although there is no guarantee that they will always outperform regular SIPs.
When Does Smart SIP Perform Better?
Smart SIPs tend to perform better in bear markets or during periods of high volatility. Since the investment amount increases during downturns, investors can buy more units at lower prices. When the market eventually rises, those units increase in value, leading to higher returns.
However, in a consistently bullish market, a regular SIP may perform just as well, or even better, since Smart SIPs reduce the investment amount during these periods.
Long-Term Returns: Smart SIP vs Regular SIP
Anand Rathi of MIRA Money compared the returns between Smart SIP and regular SIP over 10 years, from 2011 to 2021. The analysis showed that Smart SIP can provide around 1-1.5% higher returns than regular SIP. This might not seem like a big difference in the short term, but over 20-25 years, the difference becomes significant.
Here’s a look at how Smart SIP can add value over time:
| SIP Amount (Rs.) | Year | 12% SIP Returns (Rs.) | 13.5% SIP Returns (Rs.) | Loss on not choosing Smart SIP (Rs.) |
|---|---|---|---|---|
| 5,000 | 10 | 11,20,179 | 12,13,555 | 93,376 |
| 5,000 | 15 | 23,79,675 | 27,06,657 | 3,26,982 |
| 5,000 | 20 | 45,99,287 | 55,19,003 | 9,19,716 |
| 5,000 | 25 | 85,01,033 | 1,08,16,222 | 23,15,189 |
From the table, we can see that over a 25-year period, Smart SIP could result in earning an additional Rs 23.15 lakh compared to a regular SIP. This difference is due to the extra 1.5% returns that Smart SIP offers by adjusting investments based on market performance.
Is Smart SIP Always Better?
While Smart SIP offers a unique way to adjust investments based on market conditions, it may not always guarantee better returns than a regular SIP. Its performance depends on market cycles, and in some cases, regular SIPs may outperform during bullish phases.
However, if you’re looking for a more dynamic investment strategy that aligns with market fluctuations, Smart SIP could be an excellent option for long-term investors, especially those looking to capitalize on market downturns.
