Equity markets are going through a bad phase. The conventional wisdom has it that you should invest more when the markets are down to maximise wealth. That means you should invest more than your regular Systematic Investment Plan (SIP) when the markets are down. The job can be easily done by flexible SIPs. Kotak Mahindra AMC has launched its version of flexible investment plan called Flex SIP/STP Plan. A flexible Systematic Investment Plan (SIP) or Systematic Transfer Plan (STP) helps you to invest more money without any extra paperwork or formalities when the market is down.
Flexible SIP plans are typically linked to a key ratio. Once the market goes down and it hits the pre-fixed level or below the key ratio, the flexi SIPs kick in and the investments go up automatically. For example, the Flex SIP/STP option launched by Kotak Mahindra AMC uses P/E Ratio of the Nifty 50 for the same purpose. By default, it will invest three times of the SIP amount if the P/E ratio becomes equal to or falls below 15. The good part is that you can specify the amount in the application form to be invested in both scenarios, when the equity markets are low or high.
Though it reads like an ideal solution, many investment experts have issues with flexible SIPs. “Flexible SIP plans are extremely complicated and there are very few schemes with this option in the market,” says Trupti Muralidhar, Director, BITS portfolio Advisors. Most investment experts believe that investors would be in trouble if the SIP amount goes dramatically higher.
“The major disadvantage with such plans is that the investor doesn’t know how much amount will get deducted from his bank account,” says Bharat J Gandhi, a mutual fund advisor based in Mumbai. For example, if the flexible SIP amount jumps from Rs 10,000 to Rs 50,000 from Rs 10,000 or five times when the markets are low. This can result in serious financial complications. You might suddenly find that some of your cheques have bounced or you don’t have money to take care of some of the commitments that are dure later in the month.
This problem can be solved to a great extent if you put a cap on the maximum SIP amount. The application forms usually have the maximum and minimum limit. Make sure you opt for a maximum amount that would not upset your monthly budget beyond a point. However, you still may have to be proactive and keep track of your account balance to ensure that you have enough money in the bank account to take care of your commitments.
Another way out?
“I advise my clients to keep around 10 per cent of the investible corpus in liquid funds and use the STP route for additional investments whenever the equity markets fall by 7-8 per cent,” says Muralidhar. According to him, this is a better way of investing more when the market falls than the flexible SIP. Also, flexible SIP option is not available in all schemes. You can overcome this hurdle by using this ingenious method of investing.
“Using a combination of SIP and STP helps you to know when and how much are you actually investing,” says Gandhi.