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What is the smart SIP? Is it better than the normal SIP?

Innovations that are mounted on the SIP, such as smart SIPs, tend to have an element of timing the market and hence should be avoided, suggests Ashutosh Gupta

Can you please tell me a bit about the smart SIP? Is it better than the normal SIP?
- Vishal Bansal

No, we believe that nothing beats the simplicity and the discipline of regular investing that comes with the simple form of SIP investing. Every now and then, you come across these innovations that come with some twist to the SIP story in order to make it smarter or more sophisticated and smart SIP is one of them. What happens in a smart SIP is that the amount of money that gets invested in equity every month is somewhat linked to the level of the markets. So, it is driven by an algorithm that determines whether the markets are expensive or cheap based on certain predefined parameters like the level of the market or the valuation of the index and several other parameters. And if the algorithm is of the view that the markets are expensive, then out of your SIP amount, only a part of it is invested in equity while the rest of it is diverted to a liquid fund instead of an equity fund. That is broadly the mechanics of how the smart SIP works.

Now, let's take a step back and understand how SIPs fit into your equity investing. Equity investing is generally a bet on the economy. If you believe that five-10 years down the line the economy would be bigger, businesses that make up the economy would be bigger, they would be selling more and they would be earning more, then you should be investing in equity. So, equity investing generally mirrors or reflects the growth in the economy. But the problem is that the equity markets do not grow as smoothly. If they were to grow smoothly, then one could even have invested a lump-sum amount in equity markets and there would not have been any need for an SIP. But time and again, equity markets have a tendency to run ahead of themselves and at times they are far ahead of themselves and they reach a bubble-like situation. That is where the worry lies. If you end up investing at a time when the markets are in those bubble-like situations and thereafter if that bubble bursts, then your investments can be subjected to deep corrections and you could suffer a deep value erosion and the journey back to reclaim your original investment value could be long and painful, leaving aside any returns that you make out of it.

So, the idea is that in order to benefit from equity markets, one should invest smaller amounts at different market levels rather than investing all the amount at the one market level and do that simply to avoid the possibility of catching a market high when it is nearing its peak. And SIP is a very simple and time-tested way to do just that. Now the irony is that with all these innovations that are mounted on top of the SIP, all of them have an element of timing the market which is precisely the devil which an SIP is originally supposed to be an antidote to. So, the idea is that you should avoid all these innovations and stick to the good, old and simple form of SIP investing. The real magic does not happen with these innovations, the real magic happens by investing through the ups and downs of the market and do that consistently over a long period of time and during this while also, you look to increase your SIP amounts periodically, with an increase in your income and that is something that you should focus more on and stick to the simple form of the SIP.

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