How Trigger SIPs can affect your investment strategy

Many investors in the market employ various SIP triggers to enhance their investment strategies. (iStockphoto)
Many investors in the market employ various SIP triggers to enhance their investment strategies. (iStockphoto)

Summary

  • These may not be as effective unless the incremental capital invested is significant enough.

A traditional systematic investment plan (SIP) comes with a fixed schedule and is known to be effective in mitigating market volatility by evenly distributing investment costs over market cycles. However, investors can miss out on opportunities that arise during market dips. Trigger SIPs address this concern and have since emerged as an alternative investment strategy.

Trigger SIPs offer investors the flexibility to time their investments— certain market conditions act as triggers that activate or deactivate investments. Many asset management companies offer investors two trigger options that activate either when the market rises or falls by a certain level. Some people use this strategy to get more value by investing more when the market is down.

In this article, we delve into the limitations of Trigger SIPs and why these may not always be the ideal investment strategy.

Popular triggers

Many investors in the market employ various SIP triggers to enhance their investment strategies. The Price-Based Trigger is a common choice, where SIP amount is increased by a certain percentage when the asset’s price or fund’s Net Asset Value (NAV) falls by a corresponding percentage. Additionally, the Lump sum Trigger is a variant of this approach, allowing investors to make a lump sum investment when the asset’s price experiences a specific decline. Another popular option is the Value/PE (price to earnings-based) Trigger SIP, which monitors the Price to Earnings (P/E) ratio of benchmark indices such as Nifty or Sensex. When this ratio falls below a predetermined threshold, investors increase their SIP contribution by a predefined amount.

Scenario analysis

The base case scenario involves a hypothetical investment where an individual starts a monthly SIP of 10,000 in Nifty50 TRI on 1 January 2000 and continues this SIP until 1 October this year. This implies a total investment of 28.6 lakh in 23 years. As of 30 October, the investment grows to 2,06,40,238.1, representing a portfolio XIRR (internal rate of return) of 14.201%. The absolute returns is 622%.

This example serves as a benchmark against which we can compare and evaluate different investment strategies or variations.

Scenario 1 investigates the effects of a trigger SIP under specific conditions. In this scenario, whenever the Nifty index experiences a monthly decline of 5% or more, the SIP contribution for the following month is doubled. The 23-year SIP, same as in the base case scenario, however results in a total invested corpus of 32.3 lakh. By the end of October, the investment grows to 2,45,60,840.66, implying a portfolio XIRR of 14.239%. This approach led to impressive absolute returns of 660%— an increase of 39,20,602.55 in the final corpus when compared to the base case. However, the thing to note here is that the portfolio XIRR remains almost the same.

Under Scenario 2, whenever the Nifty index registers a monthly decline of 10% or more, an additional lump sum investment of 1 lakh is incorporated into the investment strategy, leading to a total investment of 42.1 lakh in 23 years. By the end of October 2023, the investment had grown to 3,78,17,528.59, resulting in a Portfolio XIRR of 14.140%. The strategy yielded impressive absolute returns of 798%, which translated into an increase of 1,71,77,290.47 in the final corpus compared to the base case. This scenario demonstrates the potential impact of adjusting investment decisions in response to specific market conditions, however the Portfolio XIRR still remains the same.

In Scenario 3, whenever the Nifty PE (price-to-earnings) ratio falls into the 1st Quartile, the SIP amount is boosted by 20% for the upcoming month. This strategy over 23 years resulted in a total invested corpus of 29.92 lakh. By the end of October, the investment had grown to 2,25,69,645.24, with a portfolio XIRR of 14.31%. While this strategy showcases a different approach to trigger-based SIPs, it is interesting to note that the portfolio XIRR doesn’t change significantly here as well.

(Graphic: Mint)
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(Graphic: Mint)

Observation: Despite employing various trigger-based SIP strategies, the portfolio XIRR doesn’t exhibit substantial variations. It emphasizes the notion that an investor seeking to enhance their final corpus should consider investing during market downturns. Trigger-based SIPs may not be as effective unless the incremental capital invested is significant enough to lower the average purchase cost of the asset or fund.

“Trigger SIPs goes against the very idea of an SIP. A SIP is meant to encourage investors to invest in a systematic manner by disregarding market movements. An SIP is a behavioural hack to remove fear of investing and to liberate the investor from the folly of trying to time the market. A trigger SIP tries to inculcate an idea that SIPing is not enough and you need to time even your SIPs. I think this is a regressive investment idea though it may be a good marketing idea. We have seen such degradation of the idea of SIP in other forms as well - like for example choosing the “best" day for a SIP in month based on past few years of return data," said Ravi Saraogi, co-founder of Samasthiti Advisors.

Nirav Karkera, head of research at Fisdom, believes that SIPs’ core proposition lies in the concept of rupee-cost averaging over time. A basic SIP is designed as the ideal approach for accumulating units over the long term. However, over a period, equities witness bouts of cyclical downturns as well. Simply recognising such cyclicality offers investors an opportunity to optimise investments without taking on too much risk or deviating from the current investment plan.

The returns on investments are unaffected if the SIP starts at market peaks or bottom in the long run

The investments made during the 2008 market peak and the 2008 market bottom both yielded similar portfolio XIRR values of 12.522% and 12.79%, respectively, by October 2023. Similarly, investments made during the 2020 market peak and bottom resulted in Portfolio XIRR values of 13.549% and 14.92%. These figures highlight that over longer investment horizons, the choice of entry point has a relatively minor impact on returns.

However, it’s essential to recognize that in the short term, the story can be quite different. Market timing during shorter periods can significantly affect returns, as seen in the variations between the market peak and market bottom scenarios for 2020, which exhibit distinct differences in portfolio XIRR. The above data underscores the importance of considering long-term investment goals and staying invested through market cycles to achieve consistent returns, while short-term market timing may introduce more variability in outcomes.

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