In our previous post, we discussed SIPs and the 5 different types of SIP available in India. While doing our research, we found many companies started to offer Smart/ Dynamic SIP.
They are promoting these smart SIPs heavily. But most of us don’t even know how these Smart SIPs work and wonder if we should invest in them.
So, let’s dive deep into what Smart/ Dynamic SIPs are, how they work, the benefits and drawbacks of Smart SIP and whether you should invest in them.
Estimated read time: 4 minutes and 36 seconds
Buckle up. Here we go!
What is Smart/Dynamic SIP?
A Smart or Dynamic SIP is an advanced variant of the traditional Systematic Investment Plan (SIP). It takes SIP investing to the next level by combining dynamic allocation and market-timing strategies.
Unlike regular SIPs, where a fixed amount is invested at regular intervals, Smart SIPs adjust the investment amount or allocation based on market conditions. It aims to generate alpha over regular SIP.
Also, different mutual funds and FinTech companies have different names for these SIPs, like Booster SIP, Value SIP, Alpha SIP, Flex SIP, etc.
How does Smart/Dynamic SIP work?
Smart SIPs utilise algorithms and models to analyse market data and make investment decisions. These models consider market trends, indicators, and valuation parameters like the price-to-earnings (P/E) ratio.
Based on this analysis, the Smart SIP algorithm dynamically adjusts the investment amount or allocation to capitalise on market opportunities.
Let’s understand the working of Smart SIP with an example. Suppose you decide to invest ₹5k in a mutual fund through Smart SIP.
The algorithm will analyse various market indicators and determine the appropriate investment amount for each SIP instalment. If the market is performing well and the indicators are favourable, the algorithm may suggest investing ₹10k in that month.
On the other hand, if the market is experiencing a downturn, the algorithm may reduce the investment amount to mitigate potential losses.
Or, in case you want to invest a fixed amount every month. Then, if the equity market is overpriced, the model will increase your allocation in debt investment in that month and vice versa.
Benefits of Smart/Dynamic SIP
1. Potential for Higher Returns
The primary benefit of Smart SIPs is the potential for higher returns compared to regular SIPs. By adjusting the investment amount or allocation based on market conditions, Smart SIPs aim to capitalise on favourable market movements and generate better investment outcomes.
2. Market-Timing Advantage
Smart SIPs allow you to take advantage of market trends and dynamics. By adjusting the investment amount or allocation in response to market conditions, you might generate alpha returns and enhance your investment performance.
3. Risk Mitigation
Dynamic allocation in Smart SIPs helps mitigate the impact of market volatility. When the equity market is overvalued, the algorithm may suggest a higher investment in debt funds to maximise gains.
4. Efficient Wealth Accumulation
Smart SIPs facilitate the accumulation of wealth efficiently. By adjusting the investment amount or allocation based on market conditions, you can make the most of favourable market opportunities and potentially accelerate your wealth-building process.
Drawbacks of Smart/Dynamic SIP
1. Complex Investment Strategy
Smart SIPs involve complex algorithms and market-timing strategies. While these strategies aim to enhance returns, they also require a deep understanding of market dynamics and indicators. It may not be suitable for beginners or investors who prefer a more straightforward approach to investing.
2. Reliance on Accurate Predictions
The success of Smart SIPs depends on market indicators used and accurate market predictions. If the algorithm fails to accurately measure market trends, there is a possibility of suboptimal investment decisions. It’s important to recognise that predicting market movements consistently is challenging, even for experienced investors.
3. Potential for Over complication
Smart SIPs introduce a layer of complexity to the investment process. For some investors, this complexity may lead to confusion or decision paralysis. It’s crucial to thoroughly understand the underlying principles and mechanics of Smart SIPs before diving into this investment strategy.
4. Higher Costs
Smart SIPs may involve higher costs compared to regular SIPs. The sophisticated algorithms and models employed in Smart SIPs require significant computational resources and expertise, which can result in additional fees or charges.
Should you invest in Smart/Dynamic SIP?
Smart or Dynamic SIPs offer an innovative approach to investing by combining dynamic allocation and market-timing strategies with a regular SIP. They provide the potential to optimise our returns, capitalise on market opportunities, and mitigate risks.
All this makes so much sense, right? You invest less when the market is overvalued and invest more when the market is undervalued. By doing this, you can easily earn better returns than investing in a regular SIP.
But, it’s important to note that Smart SIPs are not foolproof and require a good understanding of market dynamics.
Experts suggest SIP is one of the best ways to invest because it doesn’t rely on timing the market. In regular SIP, you invest money every month consistently for a long time. You don’t worry about timing the market; you focus more on time in the market.
But these new Smart SIPs are trying to generate alpha over regular SIP by timing the market. Nothing wrong with it, but you need to have expert knowledge of the market and the working of these Smart SIPs to keep track of your investments.
That’s why we would never suggest these smart SIPs to a beginner. For a beginner, investing in a regular SIP with a step up in investment amount every year is the best mode of investing.
Things to look for before investing in Smart SIP
If you are planning to invest in Smart SIPs, there are some things you should know before investing.
Different mutual fund companies and FinTech companies have different models to enable Smart SIPs for you.
You should know which market indicators are being used in the model. Understand how the investment process work. Will the model change the investment amount or the asset allocation based on the market condition?
Past performance doesn’t guarantee future performance. Despite that, you need to analyse historical returns generated by the model.
If any company promotes that their Smart SIP model has generated a 3-4% alpha over regular SIP, ask them for the source data and analyse it.
It is better to avoid investing in Smart SIPs of companies which doesn’t provide much information on the market indicators used in the model or the historical performance.
Remember, investing is a long-term commitment, and it’s essential to consider your financial goals, risk tolerance, and investment horizon before choosing any investment strategy.
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