Turning an age-old idea on its head isn’t always the smartest thing to do despite the disruptions taking place around us, yet it won’t be a bad idea to consider modifying your traditional systematic investment plans (SIPs) in favour of better alternatives.

This may sound heresy for investors who consider SIPs to be their bedrock but they might appreciate a few points to undertsand our logic. However, let’s first acknowledge the sheer brilliance of systematic plans — without these, the concept of rupee cost averaging would have been a failure; without these, investors would have lost out on in-built affordability, convenience, method and discipline. After all, SIPs do allow investors to buy funds at reasonable rates over a stretch of time.

That premise, however, might look a bit too simplistic at times. In fact, it would work the most when conditions are perfect, that is, when the market is consistently in a flux. Its most ideal setting, which would potentially offer terrific opportunities to buy at the lowest levels and sell at the highest levels, is not always achieved.

At certain points, the market might only quickly advance. Indeed, the latter would occur during periods marked by secular bull runs.

So far, so good. Yet the question we pose today is this: Why should an investor necessarily keep on investing a fixed amount on a pre-set date when the market is going from a new high to the next higher level? Well, the answer is straight. Don’t. Do not invest just for the sake of investing; instead, feel free to skip an instalment or two. While that would indeed disrupt the SIP, it would be perfectly in line with the spirit of things.

Let’s put it more lucidly. An ordinary investor is likely to derive sharper returns if he can alter his strategy in favour of finer options. The latter can involve bypassing regular contribution or even significantly increasing his monthly allocation. Hiking it by even, say, five times for two or three months at a stretch can be advised if such a move seems appropriate.

Need value-added SIPs

The idea is to react correctly when the market has turned relatively cheap or expensive. When prices are low, and stocks are available at attractive valuations, why should a participant lie low and allocate the same resources as always? Alternatively, why should he keep investing an equal amount when valuations have turned expensive and show no signs of retracting?

This, of course, underscores an investor’s need to start value-added investment programmes. This can be achieved with the help of a few basic principles. Here, we assume that such an investor wants to create wealth with the help of equity funds — in other words, we deliberately keep debt funds away from the equation.

• Select a liquid fund along with an equity fund (that is, the destination fund) with the intention of strategically moving small amounts from the former to the latter
• You can do this by parking your surplus resources in the liquid fund, use it in the way a mountaineer uses a base camp on his way to the summit. Keep replenishing the liquid fund as you go along
• When valuations are too prohibitive, bypass the monthly allocation
• Whenever such “unfriendly” junctures materialise, simply stay put in the liquid fund
• When the market has declined, increase and accelerate your allocations. Lower the valuation, higher should be your monthly commitment

Now, it cannot be conclusively proved that the strategy mentioned above would always deliver better returns. However, we are ready to claim that one’s average score would improve over a period of time, say seven-nine years, compared with the returns generated by a traditional SIP.

The latter, as committed investors would no doubt know, follows a classical policy of consistency — allocation of a specific amount every month in a specific fund irrespective of market conditions without skipping any installment.

Astute readers would mark our use of the words “specific fund” in the last sentence. Naturally, this is the absolute mother lode; the choice of fund can make a tremendous difference to overall returns. The margin of safety offered by a fund is the moot factor here. When valuations turn expensive, the margin of safety is low.

On the other hand, when valuations are cheap, the margin of safety is on the higher side. Quite obviously, the fund’s net asset value (NAV) is taken as the reference point.

Remember, in the modern world of investments, the old order keeps changing in many ways. There is a need for a disruptive rationale in the context of SIPs too. The average investor is technologically-enabled these days; he is quite familiar with the online facilities that make his life so much easy.

There is a clear case for moving over to online platforms (from the sheer physicality of transactions). Investments, switches, redemptions and the like are far smoother these days than before. Given these advantages, an investor can exercise firmer control on allocations.

Changes in tactics can be effected with great ease nowadays, a point that should be noted by all in their quest for superior returns.

The writer is director, Wishlist Capital Advisors