Twist your SIP to make the most of it

The new versions of SIPs allow you to boost investments. But mind the complications

When it comes to investing in equity mutual fund (MF) schemes, there’s hardly a better way to invest than the good old systematic investment plan (SIP). But did you know that you can twist them to suit your objectives? Over the past few years, fund houses and online distributors have changed the way you make investments in SIP.

The simple SIP

This one’s the traditional way, but let’s brush up, shall we? All fund houses offer the plain-vanilla SIP.

Here, you decide your frequency (daily, weekly, monthly or quarterly) and your amount, fill up the application form and submit it. Typically, you need to fill two forms, one to open your account with an MF and the other is an SIP mandate, with your bank details, account number, and so on, which your fund will then send to your bank.

You can either set up a bank standing instruction to transfer money every month to your MF scheme or you can give post-dated cheques. “The post-dated cheques are a very old system now and less than 1% of SIP applicants give cheques. The preferred way is the bank transfer route," said the head of customer services of a foreign fund house who did not want to be named as he is not the company’s official spokesperson.

Earlier, you needed to invest a small lump sum amount first (minimum investment amount used to be about 5,000) if you wanted to open an account with a MF. After a month or so, you were allowed to open an SIP account. Now, you can straightaway open an SIP account with most fund houses. Some fund houses call such accounts zero-balance SIP.

You could either ascertain how much you’d like to invest every month depending on your monthly income and expenses and how much surplus you are left with. Or, you could fix a goal (some years away) and then work backwards and determine the monthly investment you need to make every month to reach that goal.

You need to assume a market rate at which you think your investments could grow. In January 2014, we had explained how to do this in the article titled “Baby steps to reach a big goal". (Read it here: http://tinyurl.com/px9pzky.)

Step-up SIP

In an SIP, we usually fix an investment amount for every month or quarter. But maintaining such regularity of investments is not feasible for everyone. Let us explain:

Assume you are 30 years old now with monthly expense of about 20,000 and you want to save for retirement. At an inflation rate of 7%, your monthly expense at the age of 60 would be 1.52 lakh. Now, if you assume you will live till 85, it means you will require about 3.59 crore at the age of 60 to fund your monthly expense till 85 years of age, given a few assumptions (see graphic).

If you were to start a plain-vanilla SIP, you will need to invest about 16,000 every month starting today to be able to reach that goal, assuming markets will grow at 10% on a compounded annualized basis. That sounds like a pretty steep goal; not many people can afford to set aside 16,000 every month. And mind you, that’s just for one goal, retirement. You will also need to set aside money for your other goals such as children’s education, marriage and so on. What do you do?

Here’s where step-up SIP comes in. This facility is different from a simple SIP in the sense that it allows you to start off with a small monthly instalment in the initial years and then increase your commitments as and when your income goes up, like, say, when you get a salary hike. In our example, calculations show that even if you start with as little as 3,000 (monthly instalment) in the first year and then increase the monthly commitment by 1,000 from the second year onwards, and then later introduce larger hikes of 3,000-5,000 in the future, it’s possible to accumulate a corpus as big as 3.59 crore when you turn 60.

“This is the only practical method to achieving various goals. Short- and medium-term goals may get precedence in the immediate future over goals that are further away. Therefore, we would suggest stepping up monthly investments over time to meet retirement or other long-term goals," said Suresh Sadagopan, a Mumbai-based financial planner.

There are two ways in which you can put more money in your existing SIPs. Fund houses call them by different names, but typically they are called step-up SIP and top-up SIP.

In a step-up SIP, you can increase your monthly commitment. In a top-up SIP, you can put a lump sum money as and when you are left with a bigger surplus, say, when you get a bonus or redemptions from some past investments that you had made.

You must, however, remember that these are just names; you will need to ask your financial planner or the fund house for the specific SIP facility you need that fits your requirements.

Value investing plan

This is where a value investing plan (VIP) comes in handy. Here, your monthly instalments are not fixed. They vary from month to month, depending on the market levels. There are finer tweaks between one MF’s VIP from another, but the core principle remains the same.

Take the case of FundsIndia.com’s VIP. Here you can fix a target rate of return, say, 15%. This is the growth rate that you think your fund will— or ought to—have over a period of time. You also need to select a maximum monthly instalment amount; some fund houses have a limit on this.

“A fixed upper limit helps because if the markets fall drastically, your VIP should not force you to invest a disproportionately higher amount, which you may not be able to afford," said Srikanth Meenakshi, director and chief operating officer, FundsIndia.com.

Typically, a VIP works better than an SIP. A VIP done in Franklin India Prima Plus between April 2004 till date gave a return of about 19% compared with a plain-vanilla SIP in the same scheme which returned 15%.

Different fund houses have various versions of VIP. HDFC Asset Management Co. Ltd, for example, has two such options; one, where you invest more when markets go down but invest the same where markets go up (HDFC Flex Systematic Transfer Plan), and the other where you invest more when markets go down and less when the markets go up (HDFC Swing Systematic Transfer Plan).

But instead of asking investors to choose a targeted return, it calculates the value of investments each month, compares the same with what it would have been with a fixed monthly instalment and then comes up with each month’s instalment figure. Also, HDFC Asset Management’s plans are systematic transfer plans (STP) and not SIP; which means you have to put a lump sum amount in a liquid or a debt fund first; money then flows out of it and into an equity fund.

What should you do?

If you are a salaried individual, SIP is the best way to invest in an MF scheme. Ask your distributor or financial planner about any interesting SIP features that your MF offers and then decide.

Unfortunately, there isn’t a source yet that provides comprehensive information on the various SIPs on offer from different fund houses. We asked the two largest registrar and transfer agents (Computer Age Management Services Ltd, or Cams, and Karvy Computershare Ltd) which fund houses offer what SIP facilities, but did not get a response.

That might make the job a bit tedious for you if you want to invest directly with a fund house. We suggest you either call up your chosen fund house or ask a distributor or a financial planner.

Additionally, though both SIPs and VIPs are on offer, SIPs are simpler to understand. Stick to SIPs if you want simplicity; after all, one of the main reasons behind investing in an SIP is that you don’t have to bother about timing the market—it can go up or down, not your problem.

Opt for VIPs only if you fully understand what a VIP entails and its repercussions. “Most of our customers take the plain SIP because VIP and flex SIPs could be difficult to understand," said the head of research of a wealth management division at a private bank requesting anonymity.

We agree.