The Systematic investment plan (SIP) route of taking exposure to mutual funds has been quite popular among investors. Investing a fixed sum of money across market cycles periodically (usually every month) is a disciplined way of accumulating a corpus over the long term.

But what if you are allowed to be flexible with your SIP by investing more when markets fall and less when corrections happen? This ‘flexi-SIP,’ as a concept, is not new. Many online platforms and third-party apps allow you to vary investments based on a pre-set criteria, usually based on index levels and/or market valuations (PE multiples). Such strategies that attempt to time market entry and exit for investors must be followed with caution, especially by new and low-risk investors.

Kotak Mutual Fund has recently come up with a ‘Smart Facility,’ which is essentially a variable SIP mode of investing.

What is Kotak Smart SIP?

Kotak Smart facility is available on SIPs, SWPs (Systematic Withdrawal Plans) and STPs (Systematic Transfer Plans) in all of its open-ended equity schemes, equity index funds and Kotak Equity Hybrid Fund.

A base investment amount is set and then as per the net equity allocation, the investment amount can be changed within a range of 0.5x-2x of the base amount. For instance, let’s say you use the SSIP (Smart SIP) /SSTP (Smart STP) facility in the Kotak Bluechip fund with a base amount of ₹10,000. The criterion for the Smart SIP is that whenever the net equity allocation of the Kotak Balanced Advantage Fund (BAF) is more than 60 per cent, your SIP investments in those months would be half the base amount —, ₹5,000. The amounts would be ₹10,000 and ₹20,000 if net equity allocation of BAF is in the range of 40-60 per cent and more than 60 per cent, respectively.

The investor is free to alter the ratio based on his/her own cash-flows. The process is similar for SSWP as the amount withdrawn will be half of the base amount or the investor-defined amount, if the net equity allocation is more than 60 per cent, while it will be double the base amount or an investor-specified sum when net equity allocation is less than 40 per cent. Do note here that that the investment amount will be decided as per the net equity allocation on trigger date and not the SSIP/SSTP/SSWP date. Hence, for SSIP, the trigger date is 10 days before the date of investment specified by investor, while the same is one day before the investor defined date for SSTP and SSWP. These facilities are available on Kotak MF’s website and with fund distributors as well. You will have to fill a form.

Take note
Strategies that attempt to time market entry and exit for investors must be followed with caution
Net equity allocation

Kotak BAF follows a dynamic asset allocation strategy. It varies its equity exposure depending on how attractive the stock market looks, based on factors such as market valuations and sentiments (momentum) while keeping the gross equity allocation more than 65 per cent to enjoy favourable taxation. The fund uses derivatives to hedge the equity exposure, while the portion that remains unhedged is called the net equity allocation on which the Smart facility is based. Harish Krishnan, the fund manager, says the equity allocation for Kotak BAF is decided considering a combination of valuation metrics. These are the trailing price-to-earnings (P/E) ratio of India’s top-100 companies based on market capitalisation and other sentiment parameters such as breadth of the market, volatility measures such as the VIX (Volatility Index) and short-term and long-term rolling returns of the Nifty 50 index. Hence, for instance, whenever the P/E seems cheap, the fund might see it as an opportunity to increase equity allocation.

Hits and misses

Being a complex way of investment, the SSIP facility may provide investors with an opportunity to earn extra returns. As per the back-testing data of the fund house, for the last 12 years, a base monthly investment of, say, ₹1 lakh in Kotak Flexi Cap fund would have generated ₹1.83 crore more over the traditional SIP of same monthly investment. Of course, an extra amount of ₹37 lakh would have been invested due to the criteria set by the fund. However, do note that this strategy can be risky. It goes with the expectation that the past data would play out in the future and the criteria would work well.

It actually goes against the very idea of SIPs. For most investors with low-to-modest risk appetite and defined monthly cash-flows, time in the market is more important than timing the market.

Asset allocation could also get distorted in your portfolio due to uneven outflows on one specific fund. So, investment in one fund from the Kotak may become bloated in your overall portfolio. Besides, if there is prolonged underperformance, you may have to switch larger amounts on some other better-performing scheme from another house.

Highly seasoned investors who understand markets, have risk tolerance and the cushion for extra cash-flows could probably take exposure via small base amounts. For most other regular retail investors, traditional SIPs are the way to go. If a Kotak fund’s performance is consistently good, investors can always step up SIP amounts.