Flexi SIP is a systematic investment plan that allows an investor to change the amount to be invested based on market conditions. With a Flexi SIP plan, the investor can set a range of SIP installment amounts from the minimum to the maximum amount to be invested in a SIP plan. The amount to be invested is automatically debited from the investor’s account and invested in units based on the market condition.
For example, Kotak Mahindra NSE -1.28 % AMC launched a Flex SIP/STP option that uses the P/E Ratio of the Nifty 50 for the same purpose. If the P/E ratio rises to or drops below 15, it will automatically invest three times the SIP amount. The good news is that, in both cases—when the equity markets are low or high—you can specify the amount to be invested in the application form.
The Flexi SIP plan can lead to potentially higher returns compared to a conventional SIP. However, the major disadvantage of a Flexi SIP plan is that the investor does not know how much amount will be deducted from his bank account, which can result in serious financial complications.
How does Flexi SIP Works
Flexi SIP works by allowing investors to modify the amount of their systematic investment plan (SIP) according to market conditions. The investor sets a minimum and maximum range for their SIP instalments, and the amount automatically debited from their account is adjusted based on triggers such as the market hitting a particular valuation or scheme NAV changing by a certain percentage.
In a falling market scenario, a higher amount is automatically invested to get more units, while in a rising market scenario, the pre-decided instalment amount gets invested. This plan could potentially lead to higher returns compared to a conventional SIP. The investor also decides the amount that should be invested per month and the tenure.
Flexi SIP solutions also offer a trigger-based option, where the SIP amount is determined by triggers such as the broader market hitting a particular valuation multiple or scheme NAV changing by a certain percentage. For example, the flexi SIP facility by Kotak Mutual Fund takes into account the prevailing PE of the Nifty50 index to decide the monthly SIP outflow.
If the difference between the minimum and maximum SIP amount is wide, then the final result could turn out to be lesser than what the investor might have desired. A wider flexi SIP limit would lead to better rewards and better returns in comparison to a regular SIP.
If an investor wants to stop their Flexi SIP plan, they can easily do so, and it will take only 10 working days for the Flexi SIP to get terminated on receipt of the request.
Advantage of Flexi SIP
Flexi SIP, like any other Systematic Investment Plan (SIP), has several advantages for investors. Here are some of the advantages of Flexi SIP:
1.Flexibility: Flexi SIP provides investors with the flexibility to invest varying amounts at different intervals, as per their convenience. This helps investors to adjust their investment amounts as per their financial goals and market conditions.
2.Rupee Cost Averaging: Flexi SIP allows investors to benefit from rupee cost averaging, which is a method of investing a fixed amount of money at regular intervals, regardless of market conditions. This helps investors to buy more units when the market is down and fewer units when the market is up, thereby averaging out the cost of their investments over time.
3.As a default option, it will invest three-times the SIP amount when the index PE ratio equals or falls below 15. So, if you have chosen an SIP amount of Rs. 5,000, the monthly outflow will rise to Rs.15,000 when the market trades below a PE of 15. Alternatively, investors can specify the exact amounts to be invested when the PE is above and when it is below 15.
If the difference between minimum and maximum SIP amount is wide then the final result could turn out to be lesser than what investor might have desired. This way, even if the investor ends up investing only the minimum amount under the SIP, it would not be too far from the target amount. A wider flexi SIP limit of, say, Rs.3,000 – Rs.8,000 would lead to better rewards i.e., better returns in comparison to Regular SIP and also it results in more amount investment.
As Flexi SIP is better than Regular SIP, all investor would want to select the Flexi SIP over normal SIP but, one should always keep in mind if he has regular cash inflows and can arrange necessary funds required for Flexi SIP in his bank account then, Of course he can opt Flexi SIP, Otherwise the investor should select normal SIP plan.
The major disadvantage with such plans is that the investor doesn’t know how much amount will get deducted from his bank account. For example, if the flexible SIP amount jumps from Rs 10,000 to Rs 50,000 from Rs 10,000 or five times when the markets are low. This can result in serious financial complications.
Overall, Flexi SIP is a convenient and flexible investment option that can help investors achieve their long-term financial goals.