SIP – A modified version

The good response that I received yesterday on my two posts corroborated the popularity of SIP as an investment avenue for most people. Some were upset that I was trying to suggest something against their deeply held belief, others tried to convince me that the way SIP is currently being done is the only way. However, most people wanted to know more about how SIP can be used in a better manner to improve upon what is happening today.

As I said, I have been doing SIP for a few years now and have shared some of my experiences in varied market conditions. It is not necessary for me to do SIP for 15 years to get an understanding, our markets have gone through the entire gamut of possible ups and downs in the last 8 years itself. At an overall level normal mode of SIP has worked well for me. XIRR for most of my funds are in excess of 20 % which is quite good. However, one needs to understand that much of it has been due to the 2014 effect, when the markets rose sharply. Now, that is the nature of equity and financial planners will tell you it is normal but I do not think it is a good strategy to depend on exceptional years for your returns.

So, how should one approach SIP? Well, for starters any equity investment return is based on only 2 factors – how much you buy when and at what price, and how much you sell for what price and time. As we are mainly doing this for goal based financial planning, the goal time frame is when we need to worry about selling. Thus the entire strategy boils down to when should I buy, how much and at what price. Obviously, if I can buy at a lower price it is beneficial to me. Now, most people will extol the virtues of standard SIP here by saying that as we do not know how the markets will behave, it will be better that we just invest the same amount every month. As I have discussed before this is not an optimal solution at all.

The simplest strategy of a modified SIP is as follows – continue to invest in your regular SIP but keep some available cash to take advantage of any sharp corrections in the market. Let us say Nifty is at 8500 today and you are investing in a Large cap fund through SIP of 5000 Rs every month. There will be days in the next few months, due to news flows and other global events, that will see sharp corrections in the Nifty, maybe to the extent of 100 points or so. You can simply invest more in those days to take advantage of the lower NAV s. Note that this is a low risk strategy as you are buying units at lower cost as compared to your regular SIP and therefore your unit cost will be lowered. Over a period of time this will have a good impact on your returns. The trick here is to set up some benchmark triggers – decide on how much you should buy when Nifty falls by 50 points, 100 points and stick to it.

Now the above is all very well if you have extra cash at all times but that may not be the case. Also, it does not address the basic issue – bulk of your investments are still going by the standard SIP and therefore the issues outlined in the earlier posts remain. In order to derive a more robust strategy we will need to understand the market trends to some extent. Now, I am not saying that all of us will become experts in predicting the markets, I definitely do not consider myself as one. At the same time it is possible to observe some basic trending in the indices and take actions such as the following:-

• In a declining market over a period consider increasing your SIP allocation or simply buy extra units separately.
• In a rising market decrease your SIP allocation and keep the cash for purchasing at the right times.
• If there is a prolonged sideways market, consider increasing SIP allocation if the general indicators are for a strong up move and decrease it if a serious down turn is projected.
• Remember that while it is difficult to predict index levels accurately, the broad trends can normally be predicted. You will not always find the predictions to be correct but the chances are fairly good.
• In any case, your whole idea is to buy more units when the NAV is lower, so you cannot go very wrong in this.

Most people will now say, this is all very fine in theory but how can we implement it in real life? Let me share with you an implementation of SIP that I am now looking at. This was a post that I had shared in AIFW group in Facebook and it had generated a fair bit of discussion. Read this carefully to understand how it will work. I quote :-

Just sharing my plans on how I intend to do my monthly investments in ICICI Focused Blue Chip for the next 18 months. The investment date is 5th of every month.

1. Base Nifty is taken in the range of 7800 to 8200. If on 5th of a month Nifty is in this range I will invest X.

2. For every 100 point drop in Nifty from the range I will increase my investment by 1000 Rs. So if Nifty is 7500, my SIP for the month is X + 3000. If it is 7700 then my investment will be X + 1000.

3. For every 100 point rise in the Nifty above 8200 I will decrease my investment by 1000 Rs. So if Nifty is at 8500 I invest X – 3000 etc.

4. Every 3 months I will check the 100 DMA value of Nifty. If it is very different from the base figure of 8000 then I will change the range. I do not think this will be the case soon.

5. When I need less money for SIP I will put the excess in Debt, could be Liquid funds or even Arbitrage funds. If I need more money I will pay from any surplus I have OR redeem from Liquid funds.

6. I have taken Nifty as the index as the fund is a large cap fund. For funds in other categories one will need to work with the appropriate index.

I am convinced that this will reduce my unit cost of purchase over the next 18 months.

You can use the same framework but work with numbers that are comfortable for you. For example you may feel that Nifty will range around 8400 which may well be the case now. This was written some time back. Similarly, you may want to change the variable amounts or the scale. The important point is to understand the frame work, the absolute numbers will depend on individual situation.

Can I say with confidence that is the best way to go about things – surely not. Is this better than the plain Vanilla SIP that most financial planners and experts advise you to follow? Absolutely and I can guarantee better results.

In conclusion, regular SIP will work well in a market that is having a downward bias. Our markets are not such and therefore you are actually buying an asset whose price is increasing over time. When there are ways of dampening the acquisition cost of this asset you will definitely be better off when you follow such a strategy. Implementation mechanism is obviously important and once you start doing it you will get it right, maybe after a few iterations.

I can already see several people objecting to this by saying that I am trying to time the markets and how it is a bad thing to do. Well, not really but I will address that in a different post.

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