Use SIPs to fight volatility

Consider if you can replace your regular SIP with a variety of innovations that have flooded the market.

KHYATI DHARAMSI 

    Have you been caught off guard by markets that collapse like a house of cards one day and shine brightly in the next session? If you are sitting on the sidelines, wondering about the right time to jump in, fund houses offer options that take the guesswork out of equity investing. The SIP is the oldest and most widely used weapon against market volatility in the small investor's armoury. "By investing in random time slots, the investor is able to get a good average price," says Srikanth Meenakshi, director at Fundsindia.com. 
    In the past few years, fund houses have fine-tuned the SIP mode of investment and made it more sophisticated. You can now invest in weekly, even daily, SIPs. You can tweak the investment amount or even choose the index level at which you want to invest. Let us look at the various innovations in the SIP and how you can use them to your advantage in today's volatile markets. 
SYSTEMATIC TRANSFER PLAN 
If you have a lump-sum amount to invest, experts advise that you put it in a debt fund and then start a systematic transfer plan (STP) into an equity fund. STPs can be of different intervals—weekly, monthly or quarterly. "The STP is a richer version of the SIP and follows the same concept of value averaging. Markets will always be volatile. The only way to manage it is through time diversification and asset allocation," says Kalpen Parekh, deputy CEO, IDFC Mutual Fund. 
    To start an STP, the investor must have a certain minimum amount in the debt fund. HDFC Mutual Fund, for instance, requires that the source scheme should have at least 12,000. Also, the transfers are done on designated days of a month. This option suits investors who have lump-sum money, such as bonuses or sale proceeds from assets. 
FLEXIBLE SIPs 
One of the biggest innovations in the SIP, this allows the investor to change the SIP amount depending on the market level. ICICI Prudential's Flex STP plan, for instance, transfers a higher amount when the markets are down and reverts to the pre-set STP amount when they rise again. So, the investor is putting in more money when stock prices are low and holding back when the index is up. This adds that extra zing to his efforts at rupee cost averaging. 
    However, only a few mutual fund houses, such as Reliance Mutual Fund, HDFC Mutual Fund and ICICI Prudential, offer the option of flexible SIPs and STPs. But there are intermediaries who can help investors in other mutual funds. One can invest through Fundsindia.comand can call the distributor or send an e-mail for raising the investment 
    amount. "Under the Flexi SIP Investment, the investor can increase the amount with the click of a mouse or a simple phone call, or let our system work through preset parameters. Instead of investing, say, 5,000 a month, he can go with 7,000 or 10,000 if the markets are down. In this manner, he will get a much lower cost of entry," says Meenakshi. 
TRIGGER OPTION 
Mutual funds also have trigger options to help you invest or book profits at certain index levels. When the index drops to a level predetermined by the investor, the fund transfers money from the debt scheme to the equity plan. Under the HDFC Flexi Index plan, the investor can choose 3-5 index levels and specify how much amount in the debt plan should be transferred to the equity scheme at each level. "For instance, he can choose 15% to be invested when the markets drop to 16,000, the next 15% to be invested when it drops further, and likewise at varied index levels," says Surajit Misra, executive vice-president and national head, Bajaj Capital. 
    Similarly, when the markets rise beyond a level specified by the investor, the equity units can be sold and money transferred to the debt scheme. More than six fund houses offer these facilities mostly for their large-cap and mid-cap funds. Here, you can invest a smaller quantum of money at select market levels or NAV levels. 
WEEKLY & DAILY SIPs 
The SIP investor should not pay heed to the daily ups and downs in the market. Yet, if you are worried that the markets will rise when your SIP is due and decline subsequently, you could consider spreading your investments across the month. "If the investor wants to put in 20,000 every month, he can split it into four different SIPs on different days of the month," says Paul D'Souza, proprietor of Cuzinns Investment Services. 
    Some funds also give the option of weekly and daily SIPs and STPs. However, experts believe the daily mode is not a good option because it serves no meaningful purpose. Even fund houses are having second thoughts about this facility, which increases their backoffice work by over 20 times compared with that in the monthly SIP. "Under daily SIP, the cost of operation will be high for the mutual fund house. It is operationally inconvenient," says Misra. 
    Even financial planners have seen their clients bearing the brunt of daily investments from their chartered accountants. "In case of daily SIPs, the chartered accountant faces a problem as he will have to feed in 300-500 transactions while calculating capital gains at the time of filing your returns when you book profits," says D'Souza. 
    Instead, a weekly STP works better because the volatility is getting trapped and calculations are not much of a bother, say experts. "Whether you invest every month or over 365 days, the outcome is not too different. However, there is huge paperwork involved," says Parekh. 
    Considering this, the handful of fund houses that have been offering the daily SIP option are mulling over discontinuing these. "We have asked our sales team to take a relook as there are no takers for them. Besides, operationally, these are inconvenient both for the AMC and the investors," says a mutual fund spokesperson.