Whenever market corrects sharply, a deep regret enters investors because of their lack of anticipation of the situation. Studying the stock market indicates its obvious characteristic of going up and down a lot. And it is assumed that the best way to make money is to somehow buy whenever it is very low and sell whenever it is about to fall.
However, to grow our savings, the right strategy is to choose a handful of equity funds with good long-term track records and keep investing steadily through SIPs, even during crashes. Historically, every market crash has eventually proven to be a buying opportunity, easily made to serve the purpose of boosting returns. A steady, systematic investment strategy continues to be the right one. SIP is the best method to create long-term wealth by taming the bear and riding the bull market.
Flexi SIP
A flexi SIP allows you to vary the amount of your investments every month. If you do not want to invest a fixed amount, and prefer more control over your investments, you can opt for it. You will have to specify a default amount for your investments. They are typically linked to a key ratio. Once the market goes down and hits the pre-fixed level or below the key ratio, the flexi SIPs kick in and the investments go up automatically. The various types of Flexi SIP are as follows:
Flexi SIP Based On Index
For example your Flexi SIP is based on P/E Ratio of the Nifty 50. By default, it will invest “X” times of the SIP amount if the P/E ratio becomes equal to or falls below 15. This “X” varies with each AMC from two to five times of SIP.
Flexi SIP Based On Value
Under this, the amount to be invested as on the date of SIP shall be higher of:
1 Fixed amount to be invested per installment; or
2 The amount determined by the formula: (fixed amount to be invested per installment X number of installments including the current installment) – market value of the investments through Flexi SIP, two business days prior to the SIP date.
For Example, Flexi SIP Enrollment Details:
Scheme Name - XYZ
Installment Date and Frequency of Flex SIP - 15th of every month (T)
Fixed Installment Amount - Rs5000
Number of Installments - 36
Total Enrollment Amount - Rs5000 X 36 = Rs1,80,000
Period - January 2019 to December 2021
Calculation of the amount for instance on the date of the fourth installment, April 15, 2019 (T):
1 Total units allotted till the date of previous installment (March 15, 2019) is assumed as 685.50;
2 The NAV of the Scheme on April 13, 2019 (T-2) is assumed as Rs18 per unit;
3 Hence the market value of the investment in the Scheme on April 13, 2019 is Rs12,339 [685.50 X 18].
The installment amount will be calculated as follows:
Fixed amount specified at the time of enrollment -Rs5000/-
Or
As determined by the formula-[(5,000 X 4) – 12,339.00] =Rs7,661.00, whichever is higher
Hence, the installment amount on April 15, 2019 will be Rs7,661.00.
Disadvantages Of Flexi SIPs
The major disadvantage with such plans, the investor does not know the amount that will be deducted from his account. Apart from being extremely complicated, there are very few schemes with this option in the market. Since most of them cap minimum and maximum amount of such SIP, it might become an issue for some participants.
Due to its pertaining volatility, even post general elections, it is advisable to enter the market systematically through SIP only.
The author is the Founder and Promoter of GST Panacea