What is a SmartSIP Order?
A SmartSIP order is a simple order type with 2 mutual fund schemes – one leg is the equity scheme and the other leg is a liquid scheme. It works as a multi – leg composite order where based on the Margin of Safety Index (MosDex TM ) of the Equity scheme, automatic adjustments are made between the equity schemes and the liquid scheme.
If the markets are expensive, the Margin of Safety (MosDex) value is low and if the markets are cheap, the Margin of Safety value is high. The values of the MosDex will range from 0 – 200, 100 being the average level of margin of safety.
The discipline of a SIP is maintained by the SmartSIP. A fixed amount of installment is drawn each month from the investors account and based on the level of margin of safety, allocations to equity or liquid scheme are made. A detailed working of how the order works is explained below.
Warren Buffett said, “The three most important words in investing are the margin of safety.”
The Margin of safety principle is a principle widely advocated by the World’s most famous investors Warren Buffett and Benjamin Graham and Mr. Buffett has also called the principle one of the “cornerstones of investing.”
The RankMF MosDex uses qualitative and quantitative paramaters to determine a scheme’s intrinsic value. The scheme NAV is used as a reference point to compare if the margin of safety is high or low.
How do the SmartSIP orders work?
- If the margin of safety is low then the monthly Instalment amount will be invested in low risk Liquid fund instead of Equity Fund and in case the margin of safety is very low, some equity units would be sold to realise profits and rebalanced into liquid funds.
- If the margin of safety is moderate, then the Monthly Instalment amount will be invested in the selected Equity Fund.
- If the margin of safety is high then the Monthly Instalment amount will be invested in the selected Equity Fund and also a portion of liquid fund (if any) will be switched to the selected Equity Scheme.
- If the margin of safety is very high then the Monthly Instalment amount will be invested in the selected Equity Fund and also units of liquid fund (if any) will be switched to the selected Equity Scheme
For example, if you observe the price/NAV chart of the HDFC Top 100, a normal regular SIP would have invested the same amount every month. If markets were expensive, you would have still continued your SIP. However, the SmartSIP as the name is smart enough to auto adjust investments into the equity schemes and liquid schemes based on the market. If you observe the chart below, there are several periods where markets are expensive and where money is invested in liquid schemes and also several periods where markets were very cheap and higher investments were made in the equity schemes.
How to Place a SmartSIP order?
To place a SmartSIP order on the RankMF platform, go the scheme page and you shall be able to see a click button “SmartSIP”. On clicking the SmartSIP button, you shall be required to select between the SmartSIP order type or SmartSIP Plus order type. The SmartSIP Plus order type is the recommended order type.
SmartSIP orders should only be selected if your investment horizon is greater than 5 years.
The MosDex data for each scheme are licensed for use to the end user, and not sold to the end customer. The use of this data and license is subject to the client’s prior acceptance. Please refer to the complete terms and conditions.
How many schemes is the SmartSIP order type available?
Currently only equity schemes are available for the SmartSIP order type and the same is not available for debt or hybrid schemes. One of the 3 modes of SmartSIP orders viz SIP Plus, SmartSIP and SmartSIP Plus are available for all the schemes. Specific availability of the order type can be found on the quote page of the scheme.
Why is SmartSIP superior than the regular SIP order?
A SmartSIP order is much superior than a regular SIP on account of the following:
- Higher Returns
- Higher returns as compared to the conventional 70:30 Equity Debt SIP and also the only 100% Equity SIP mode
- Higher Realisable Value of the invested Corpus
- The realisable value of invested corpus is much higher as compared to corpus value of the SIP investments
- Lower Risk
- At the times when markets are expensive, instead of buying the expensive equity units, liquid units are bought which leads to lower risk
Outperformance of the SmartSIP v/s SIP on the HDFC Top 100 Scheme
Returns of the SmartSIP v/s the Conventional SIP
Observe that the the SmartSIP system beats both the regular SIP and the conventional SIP almost each and every time. The average outperformance since 1st January 2005 is 5.76% on the regular SIP and 7.17% on the conventional 70:30 SIP.
Corpus value of the SmartSIP v/s the Conventional SIP Observe that the invested corpus under the SmartSIP system is significantly higher than the corpus value of a regular SIP.
What are the variants of SmartSIP?
The SmartSIP order is available in 3 modes – SmartSIP, SmartSIP Plus and the SIP Plus modes. The difference between them is that the SmartSIP mode like a regular SIP presumes that the SIP instalment amount each month shall remain the same. So if your regular SIP amount is Rs. 10000 for 60 months over 5 years i.e. a total investment of Rs. 6,00,000, the amount under SmartSIP would also be equal to Rs. 6,00,000 i.e. Rs. 10,000 * 60 months. In the SmartSIP Plus mode, additional top up amounts are drawn from the investor depending on the Margin of Safety. For Eg. if the Margin of Safety was 106 for a particular month on SIP day, instead of Rs. 10,000 which would otherwise be drawn, Rs. 20,000 is drawn for that month. This doesn’t happen every month but rarely since margin of safety is not always high. It is a recommended strategy since more capital gets invested during cheap markets and more units get acquired. On an average, the amount drawn over a 5 year period in the SmartSIP Plus is about 10% higher than normal SmartSIP i.e. instead of Rs. 6,00,000, the invested sum over 5 years would be ~ Rs. 6,60,000 which over the life of the SIP is not a very large difference.
Disclaimer: Investments in Mutual Funds are subject to market risks. Please read all scheme related documents carefully before investing. Past performance is not an indicator of future returns.