Flexi SIPs may give higher returns but may not build a bigger corpus

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A systematic investment plan (SIP) seeks to help investors ride out the market volatility, and even benefit from it. When the stock market—and, by extension, a fund’s net asset value (NAV)—is trading lower, the predecided periodic SIP amount fetches more fund units for the investor than it would in an expensive market.

The additional units bought at lower prices contribute towards relatively better overall return for the investor. To squeeze more out of market volatility, several fund houses also offer a flexi SIP/STP (systematic transfer plan) facility. Should you opt for it?

In a conventional SIP, a fixed sum is deducted from your bank account every month to be invested into the scheme of your choice. If you want to tweak the SIP amount being debited, you will have to stop the ongoing SIP and revise the ECS mandate. This can take upto 30 days, and you will have to go through this process each time you wish to change the SIP amount.

A flexi SIP mandate saves you all this trouble. Solutions offered by most fund houses and investment platforms allow investors to modify the SIP amount within a pre-decided range—the minimum sum required to be invested into a scheme and the maximum as specified by the investor.

Flexi SIP solutions also come with a trigger-based option, where the SIP amount is determined by triggers such as the broader market hitting a particular valuation multiple or scheme NAV changing by a certain percentage. For instance, flexi SIP facility by Kotak Mutual Fund takes into account the prevailing PE of the Nifty50 index to decide the monthly SIP outflow.

As a default option, it will invest three-times the SIP amount when the index PE ratio equals or falls below 15. So, if you have chosen an SIP amount of Rs. 5,000, the monthly outflow will rise to Rs.15,000 when the market trades below a PE of 15. Alternatively, investors can specify the exact amounts to be invested when the PE is above and when it is below 15.

Does it work?
While experts say that it is a good concept, they have some reservations. “Theoretically, a flexible SIP is a good option but, in reality, it may lead to lesser savings in the long run if enough money is not regularly invested because of expensive valuations,” says Tanwir Alam, MD, Fincart.

Potentially, over many years, you could fetch higher returns through flexi SIPs, but your final corpus could turn out to be lesser than what you might have desired.

To illustrate, let us assume you have been investing in a mutual fund for the last 10 years via a flexi SIP—from January 2007 to December 2016. You had mandated a minimum monthly outflow of Rs.2,000 and an outflow of Rs.6,000 whenever the broader index PE fell below 15. Now, during this period, the Nifty PE fell below 15 just six times on a monthly average basis. This means you would have invested Rs. 2,000 for 114 out of the 120 monthly instalments—a total investment of just Rs. 2.64 lakh.

FLEXI SIPS MAY NOT ALWAYS WORK
An expensive market over the long term erodes the benefits that a flexi SIP Offer

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Nifty50 PE largely stayed above 15 for the past 10 years, thus eliminating the possibility of significant gains through flexi SIPs.
Source: Ace MF complied by ETIG Database

Vidya Bala, Head, Mutual Fund Research, FundsIndia, says, “A flexi SIP/STP structure brings an element of uncertainty in the savings since you are not investing in a fixed manner for your goals.” However, she insists that flexi SIPs can enhance the purpose of disciplined investing if used properly.

To avoid falling short of one’s target corpus, investors should fix the correct investment limits for flexi SIP. “The minimum amount for a flexi SIP should be the sum needed to reach your goal under normal circumstances. This way, even if you end up investing only the minimum amount under the SIP, you would not be far from the target corpus,” suggests Bala.

Besides, to really benefit from the flexi SIP structure, you need to have deep pockets—the range for the investible amount should be sufficiently large, she asserts. A narrow investment range of Rs.2,000-4,000 may not help one get the best out of the market volatility. A wider flexi SIP limit of, say, Rs.2,000-6,000 would lead to better rewards.

Bear in mind, monitoring flexi SIP structures—as opposed to a fixed SIP—may not be easy for all and such investors should stick with the traditional SIP. Also, for those unsure of the amount they are likely to invest each month, flexi SIPs may not make much sense.

If your monthly cash inflow is uncertain, it could be difficult for you to arrange for the necessary funds in your bank account when a higher investment needs to be made, as per the flexi SIP mandate, argues Amol Joshi, Founder, PlanRupee Investment Services.

“It is better to opt for a plain vanilla SIP structure and opt for a lump sum investment whenever the market is trading lower,” says Joshi. Additionally, advisers suggest investors can opt for SIP topups at yearly intervals—increasing the SIP amount every year—to align their investible corpus with their growing income levels.