When the Mutual Fund Industry launched the Systematic Investment Plan (SIP), it saw a jump in the number of retail investors who were attracted towards this investment avenue. Now, it has come up with an upgraded version of SIP, the Smart SIP. The additional feature of Smart SIP has made the disciplined automated investment through the SIP more advanced.
As of now, only a handful of Mutual Fund Houses provide you with the option of Smart SIP, but in the near future, we expect every AMC to follow the lead and offer this amazing feature to its customers.
What is Smart SIP?
Smart SIP is the advanced version of regular SIP where the monthly investment is done as per the market conditions, automatically. If the markets look expensive, then the plan pauses for that respective month, or the investment is diverted to liquid funds. If the markets are undervalued, then the regular investment amount is increased, and invested in equity schemes.
It uses a certain algorithm, which involves numerous factors such as price to earnings ratio, price to book ratio, etc., that decides when to make the switch to liquid funds, or skip the investment, or increase the investment amount.
Key Features of Smart SIP
- Regular Disciplined Investment:
Just like the Systematic Investment Plan of Mutual Funds, Smart SIP also instils a disciplined investment approach amongst investors. A small sum of money is deducted every month and invested in a mutual fund scheme at predetermined intervals.
However, it should be noted, when the markets are highly expensive, no investment is made for that month in some scheme. Different fund houses follow different Smart SIP models. Some may not invest during expensive markets at all, some may diverge the investment in liquid schemes.
- Buy Low Sell High:
The Smart SIP toll follows the “buy low, sell high” investment strategy. It makes sure that you buy fund units when the markets are fairly valued, and sells a part of those units when the markets are highly expensive, or overvalued. This strategy helps the investor in the long run, as the returns accrued are much higher than those from regular SIP.
- Skip Investment During Expensive Markets/Invest more During Inexpensive Markets:
The most notable feature of Smart SIP is that when the Net Asset Value of the mutual fund scheme is quite high, it skips the investment for that period. This prevents the investor from buying less units at a high price. Also, Smart SIP increases the investment amount when the markets are undervalued, which allows investors to buy more fund units at a low NAV. This increase can be from 1% to 100%, depending on the market sentiment and the scheme’s Smart SIP algorithm.
- Dynamic Asset Allocation:
As mentioned above, when the markets are expensive, SmartSIP skips the investment for that period. However, sometimes, it doesn’t skip the investment, but directs it towards liquid funds, for the money to earn decent returns, if not high. Also, when the markets are highly overvalued, it sells some units of equity schemes. The proceeds are then parked in liquid funds, till the market sentiment normalizes, and then again invested in equity schemes. This dynamic asset allocation between equity and debt, depending on the market valuations, generates higher returns than the normal SIP, which invests on a regular basis, irrespective of the market sentiment.
- Higher Returns
It is quite obvious now that the invested corpus will grow at a significantly higher rate if invested via Smart SIP, as opposed to normal SIP. The dynamic asset allocation between equity and liquid schemes, buying more at low NAV, and selling at higher NAV, and other such features allow returns to grow at a high pace.
Comparing Returns of Normal SIP and Smart SIP
In the following table, we’ve compared the 5 year returns, if one chose to invest via Normal SIP or Smart SIP in HDFC Top 100 Fund.
Here, we have compared the returns from monthly SIP and monthly SmartSIP of Rs. 10,000 in HDFC top 100 Fund, for the period of 5 years. We have taken into account the rolling returns since 2005, to factor in the slowdown of 2008 financial crisis, which had quite an impact on the financial market, and performance of the scheme
| Mode of Investment | SIP | SmartSIP |
| Investment Amount | 6 lakh | 6 lakh |
| 5 Year Return | 14.65% | 19.71% |
| Final Value of Investment | 8.71 lakh | 9.85 Lakh |
In the above table, we can clearly see a difference of a whopping Rs. 1.14 lakh over a period of just 5 years. If one chose to invest for a longer duration, say 15 or 20 years, just imagine the magnitude of this difference between these two modes of investment.
It is safe to say that, when you invest via SIP, you’ll earn quality returns, but one has nothing to lose if they upgrade to SmartSIP. Also, the possibility of higher returns is an add-on from the latter mode of investment.