All You Need To Know About The Mutual Fund Flex SIP Option - Outside View by PersonalFN

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All You Need To Know About The Mutual Fund Flex SIP Option
Jul 22, 2019

'Buy low, Sell high' is the most ubiquitous saying in the investment world.

Basically, it means, buy securities when they are priced low and sell them when their value increases. Since this strategy requires timing the market, an average investor may be unequipped to make the right decision due to lack of time, know-how, and/or expertise. Investors should instead invest an affordable amount regularly in wealth-creation assets.

Systematic investment plan (SIP) is one of the best ways to invest regularly in the mutual fund schemes of your choice because it instils a sense of financial discipline which is important for you to grow wealth.

When you invest regularly regardless of the market conditions, you buy more units when the scheme's NAV is low and less when it is high. This helps you to tide over market volatility and grow your wealth through the resultant lower cost of investment.

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When the fund's NAV is trading lower, more units get added to the investor's folio. The additional units that are purchased at a lower cost help to generate higher returns over the long term. To get the maximum benefit of lower NAV and purchase a higher number of units than a regular SIP would allow, you can opt for the flex SIP feature of mutual fund.

[Read: Do You Invest In A Mutual Fund Looking At NAVs?]

Changing the SIP amount with a regular SIP is a time-consuming process. A flex SIP saves you the trouble of making changes in the ECS mandate or stopping the on-going SIP whenever you want to increase your SIP contribution. With Flex SIP, you can pre-decide the minimum and the maximum sum to be invested in a scheme along with the tenure.

Flex SIP kicks in (i.e. additional units get purchased) when the market goes down below a pre-fixed NAV level or a key ratio like P/E. The investment will increase automatically once flex SIP gets triggered. You can specify the amount to be invested in these scenarios.

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Consider this example, if you invest in a fund with the option to trigger Flex SIP when the NAV goes below 20, here is how your investment will work in comparison with regular SIP over a period of 1 year.

Table: Comparison - Flex SIP and Regular SIP
Month NAV Regular SIP Flex SIP
Amount Invested Units Bought Amount Invested Units Bought
1 20 5000 250 5000 250
2 22 5000 227 5000 227
3 21 5000 238 5000 238
4 19 5000 263 7000 368
5 17 5000 294 7000 412
6 18 5000 278 7000 389
7 20 5000 250 5000 250
8 22 5000 227 5000 227
9 23 5000 217 5000 217
10 24 5000 208 5000 208
11 25 5000 200 5000 200
12 23 5000 217 5000 217
Total units 2871 3205
Total investment 60000 66000
Final value 66029 73711
(Note: The figures are for illustration purpose only)

As seen in the table above, additional units were purchased in Flex SIP as compared to a regular SIP when the NAV fell below 20. At the end of the year, the final value of investment was higher in flex SIP, though the total investment was higher too.

It is important that you have a wider flex SIP limit to get better rewards. A narrow investment range such as Rs 1000-2000 may not help you to get the most advantage of a lower NAV.

[Read: Mistakes You Can Avoid While Investing In Mutual Funds Through SIPs]

You should note that your SIP contribution may increase significantly if flex SIP gets triggered. Thus, if you opt for flex SIP, you should be able to sustain a higher bank balance to meet the higher investment needs. This could have serious implications on your finances. It could mean that you will have lesser allocation for your other investments and necessary expenses. Therefore, put a maximum cap on flex SIP after thoroughly considering your financial circumstances.

Additionally, if the market remains overvalued for a long period of time, flex option may not get triggered often and therefore, there may be a dearth of buying opportunities at lower price to have a big impact on your returns.

You should select the minimum amount based on the investment required every month to achieve your goals. Thus, even if the flex SIP does not get triggered, you will still be able to achieve your target.

[Read: Are You Paying Attention To Your Financial Fitness?]

The amount to be invested in the scheme as on the date of SIP is the higher of the following:

  • Fixed amount to be invested per instalment; or
  • The amount determined by the formula: Fixed amount to be transferred per instalment (x) number of instalments [including the current instalment] (-) market value of the investments through Flex SIP.

Who should opt for flex SIP

Flex SIP is suited for investors who have the capacity to invest different sums of money each month and who are ready to contribute higher investment when needed. If you earn a fixed income, it might be challenging for you to invest a higher amount than a regular SIP. Besides, making investment decisions based on market movements may not be in the best interest of your financial health.

Instead, you may opt for a regular sip and choose the step-up SIP option to increase your SIP contribution in line with the increase in your income.

Editors' note: Wish to know the best mutual fund schemes to SIP into, ELSS for tax saving this year, and schemes that have the potential to provide BIG gains?

Subscribe to PersonalFN's three premium mutual fund research reports at a price of one.

Get the benefits of tax saving, super investing, and wealth building NOW!

Author: Divya Grover

This article first appeared on PersonalFN here.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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