Investing in mutual funds via the Systematic Investment Plan (SIP) mode has become a popular choice for many investors. This facility allows you to invest a fixed amount at regular intervals in the mutual fund scheme of your choice. Such a disciplined approach to investment helps to create wealth over the long term.

[Read: What is SIP?]

Over the years, mutual fund houses have introduced several new SIP features to cater to the needs of different types of investors. The Smart SIP option is one of them.

What is Smart SIP and how does it work?

Smart SIP, also known as Flex SIP, allows you to vary your SIP contributions based on the movement of pre-defined criteria such as index level, PE ratio, etc. For instance, when the market goes down below a pre-determined level or a key ratio like P/E, the Smart SIP option kicks in i.e. additional amount will get invested compared to the regular SIP. Similarly, some fund houses also allow a lower amount to be invested if the markets turn expensive. The trigger level is usually based on an algorithm that determines whether the market is cheap or expensive.

Axis Mutual FundHDFC Mutual Fund, and Kotak Mutual Fund are among fund houses that offer the Smart SIP facility.

It is important to note that the features/strategies of the Smart SIP facility related to the maximum amount that will be invested in each instalment may differ from one fund house to another. This facility is only available for open-ended equity-oriented mutual fund schemes. Furthermore, the facility is available only under the Growth option of equity schemes.

In the case of schemes of Axis Mutual Fund and HDFC Mutual Fund, the amount to be invested in each instalment will be higher of:

  • Fixed amount as per instalment


  • The amount determined by the formula –

(fixed amount to be invested per instalment * number of instalments including the current instalment) – market value of the investments already processed through Flex SIP

On the other hand, Kotak Mutual Fund’s Smart SIP facility allows you to reduce your SIP instalment to half of the base amount when the market valuations are expensive and double when market valuations are cheap. The SIP amount will remain unchanged when markets are neutral.

In the below example, the regular month SIP amount is Rs 5,000. Let’s assume that the fair level of the equity market is at 52,000. If you opt for the Smart SIP, the monthly contribution deducted will be double of the regular SIP amount i.e. Rs 10,000 instead of Rs 5,000, whenever the market level falls below the 52,000 level. On the other hand, whenever the market rises above the 52,000 level, the SIP contribution for those months will be half of the regular SIP contribution.

Do note that the facility to reduce the SIP contribution during market highs may not be available with every mutual fund house that offers the Smart SIP facility.

Table: Difference between SIP and Smart SIP

Month Market level NAV Regular SIP Smart SIP
Amount Invested Units Bought Amount Invested Units Bought
1 50,000 20 5000 250.000 5000 250.000
2 52,000 22 5000 227.273 5000 227.273
3 51,000 21 5000 238.095 10000 476.190
4 49,000 19 5000 263.158 10000 526.316
5 47,000 17 5000 294.118 10000 588.235
6 48,000 18 5000 277.778 10000 555.556
7 50,000 20 5000 250.000 5000 250.000
8 52,000 22 5000 227.273 5000 227.273
9 53,000 23 5000 217.391 2500 108.696
10 54,000 24 5000 208.333 2500 104.167
11 55,000 25 5000 200.000 2500 100.000
12 53,000 23 5000 217.391 2500 108.696
Total units 2870.810 3522.401
Total investment 60000 70000
Final value 66029 81015

(Note: The figures are for illustration purpose only) 

As we can see in the illustration above, Smart SIP investment generated around Rs 15,000 more gains than the traditional SIP. Notably, the total amount invested was higher as well.

Should you opt for Smart SIP?

Being a relatively complex investment strategy, Smart SIP may not be suitable for most retail investors, especially new and low-risk investors. If the market is under a prolonged bear phase, a higher sum will get debited for each SIP contribution, which can put a burden on your cash flows. Likewise, if you have opted for a Smart SIP wherein a lower amount gets invested in every instalment when the market is in overvalued zone, it can result in your investment falling short of the targeted amount if the phase continues for an extended period of time.

Moreover, uneven investments in a particular scheme can disrupt your asset allocation plan. Maintaining the right asset allocation is of utmost importance to achieve an optimal risk-reward balance of your investment portfolio.

Thus, for most investors, regular SIP is enough to create wealth over the long term. SIP in itself is a time-tested investment strategy that helps you become a successful investor by investing consistently over the long term despite ups and downs of the market. Through regular SIPs, you can invest a small fixed amount pre-specified intervals so that you can take advantage of different market levels rather than investing too much or too little in a particular market phase.

SIP allows you to avoid timing the market so that you can focus on ‘time in the market’. More units get allotted to you via SIP during market corrections, and lesser units when markets are trading higher. This averages out the cost of investment allowing your wealth to grow leaps and bounds.

Click here to find out the future value of your SIP using our SIP calculator.

Instead of opting for Smart SIP, you can consider stepping-up your SIP by a certain amount or percentage year after year. The benefit of opting for step-up SIP is that it facilitates building a bigger corpus, thus allowing you to beat inflation and achieve your envisioned financial goals faster.

Furthermore, whenever there is a sharp correction in the equity market, you can consider making one-time lump sum investments in schemes where you have ongoing SIPs. Over the long term, this strategy can add to the process of power of compounding, boost your investment returns, and facilitate building a bigger corpus.

To conclude…

Smart SIP is suitable for savvy investors who understand the equity markets well, have higher risk tolerance, and are ready to contribute higher amount towards investment whenever the situation arises. Most investors would be better off continuing investments via regular SIP to benefit from the inherent feature of rupee-cost averaging and compounding of wealth.

To get the most out of your SIP investment, choose worthy schemes that align with your risk profile, financial goals, and investment horizon. Click here to check out PersonalFN’s list of 5 best SIPs to start in 2022.

Ensure that you have an investment horizon of at least 3-5 years when you invest in equity mutual funds. Lastly, ignore the market noise and continue with your investment till you achieve your set goals.

This article first appeared on PersonalFN here

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