Should you set up market-tailing SIPs?

A reader recently directed our attention to a systematic investment process called the Target Investment Plan or TIP, offered by a leading online broker. TIP is yet another addition to the various alternatives available to the traditional systematic investment plan or SIP. The question is: Should you adopt such investment processes to systematically channel your investments?

We believe that a systematic process to investing is a pre-requisite to achieving your investment objectives. Why? As humans, we are genetically wired to spend! Our savings are typically the income left after meeting our monthly expenditure. But such savings are sub-optimal, as they are unlikely to help us achieve our investment objectives. As Northcote Parkinson observed, “Expenditure rises to meet income”. This means that we are unlikely to save more just because we earn more!

Systematic investment creates an automatic savings process and helps in channelling your money into optimal investments. The process is best set-up through an auto-debit facility to your bank account. The classic form of systematic investing is the SIP. The SIP is available on mutual fund products and enables you to create an investment portfolio to help you meet your future liabilities such as buying a house or funding your child's college education.

SIP is, however, indifferent to prevailing market conditions. That is, you may choose to have an auto-debit of Rs 10,000 every month to buy units of a certain equity mutual fund. The SIP would require you to invest Rs 10,000 whether the fund's NAV increase from Rs 70 to Rs 85 or declines to Rs 50 per unit. In other words, you may invest the same amount whether the market is overpriced or undervalued.

Investment firms, hence, created market-tailing variants to the classic SIP- you invest more money when the market declines and less when the market climbs up. The question is: Should you set-up such systematic processes?

Tailing the market

We see value in market-tailing systematic processes; for such investments would allow you to earn more returns if the market climbs up after it declines! That said, we urge you to consider two issues before setting up such market-tailing systematic processes.

First, consider the cash flow issue. Investors with whom we closely work with create a monthly cash flow allocation policy. Suppose an investor sets aside Rs 50,000 a month from her current income. She will typically create multiple SIPs to channel the savings into meaningful investments. Typical plan would allocate money to equity funds, PPF and fixed-deposits every month. Varying the amount invested in equity investment every month is likely to upset this allocation plan, unless she changes other investments dynamically as well. But that may not always be possible.

Then, there is the behavioural aspect. If you are typical investor with stable income, you may be able to contribute higher amounts in any month without upsetting the monthly cash allocation; you should of course specify upfront the maximum contribution you are willing to make in any month. But the point is that it is easier to mentally set aside Rs 10,000 every month than have Rs 7,900 debited one month and Rs 13,500 debited the next month to adjust to the changing market conditions.

(The author is the founder of Navera Consulting, a firm that offers wealthmapping and investor-learning solutions. He can be reached at >enhancek@gmail.com )

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