MF Query Board

Readers are requested to send only one query at a time so that more readers get a chance. Have questions relating to any aspect of personal finance. Ask DSIJ at editorial@DSIJ.in and get your queries resolved.

What is smart SIP? How is it different from the normal SIP? And is it a better option than the normal SIP?

- Sandeep Jadhav

No, we are of the opinion that for many investors the normal SIP is the best option as nothing beats the simplicity and discipline of regular investing that comes with it. As our industry grows, we ought to see such new innovations enter the game. Smart SIP is one such innovation where there is a twist in the SIP story, trying to make it more sophisticated. However, unlike normal SIP, with a smart SIP the amount gets invested in equity mutual funds every month and is somewhat linked to the level of the markets. This means that when the markets are overvalued, it will invest only a part of your SIP. But when the markets turn undervalued, it just doubles your SIP investments in order to take advantage of the cheap valuation.

Needless to say, smart SIP is driven by algorithms which determine whether the markets are expensive or cheap based on certain predefined parameters. So, if it is of the view that the markets are expensive, then it would invest only a part of your SIP amount whereas the remaining SIP amount would be invested in a liquid fund. This is how smart SIP works. Now, let’s understand how the SIP fit into your equity investing. Equity investing is nothing but trying to bet on the economy. If you are of the opinion that in the next 5-10 years the economy will grow bigger, the businesses that make up the economy would also expand. And if you are of the conviction that these businesses would be selling more and earning more, then it makes more sense to invest in equity.

Therefore, equity investing mirrors the growth in economy. This sounds perfect, right? But the problem is that the equity markets do not grow in a linear fashion. There is historical evidence that equity markets pose a tendency to run ahead of their own selves and at times are far ahead where they reach a bubble-like situation. And this is where the worry lies. Say, if you invest at a time when the markets are in those bubble-like situations which are likely to burst, you would be staring at intense corrections leading towards deep erosion in value and the journey towards reclaiming your original investment value could be long and painful, leaving aside any returns that you make out of it.

In order to benefit from the equities, you should invest smaller amounts in a disciplined manner at different market levels rather than investing lump sum at one market level. This would help you avoid the possibility of catching market peaks. That said, SIP is indeed a time-tested way to do that for you. One thing to remember is that all these innovations are mounted over the normal SIP and all of them have an element of market timing which might go against you. Hence, it would be a good idea to avoid all these innovations and stick to the one which has been proven and tested, which is the normal SIP.

I had planned for my son’s education for which I was saving in a mix of equity and debt funds. Since his education goal is four years away from today, would it make more sense to invest the accumulated lump sum amount in gilt funds or should I opt for long duration debt funds?

- Dayanand Naik

Investing in gilt funds or even the long duration funds would make more sense in the falling interest rate scenario as when the interest rates start falling in the economy, the bond value of these funds starts surging. And that is how investors in these funds stand to benefit. However, on the flip side, they also suffer the most when interest rates start rising. Hence, they should be looked as a product to be used for tactical play when the interest rates are falling. But investors should consider exiting from them when the interest rates start to rise.

Presently, if you look at their one-year and three-year returns, they might seem to be fairly attractive because we have recently been through a phase of falling interest rates which benefited them. And this can be one of the reasons for investors getting attracted to them right now. Further, recently we have seen a surge in the 10-year benchmark bond yields. Therefore, if you look at their one-month returns when the yields on bonds were on the rise, these funds are in the negative trajectory. Therefore, as you approach your goal of paying for your son’s education, we would suggest you not to risk your capital with tactical play.

Rather, we would urge you to invest in short-term funds with Macaulay duration of less than three years. This will not only protect you from rising interest rates but also would help you concentrate more on accrual play which further reduces the risk. Moreover, we would also suggest you to opt for funds with maximum allocation towards short-term government securities and AAA-rated securities. Beware of funds taking credit risk though it is more likely that the credit risk funds might now play out. But risking your child’s education for those extra returns makes no sense.