SIP is the most popular mutual fund investment method but is it the best?
Well, SIP has two things going for it –
Cost averaging is a simple but wonderful concept.
It makes an assumption – that equity markets cannot be predicted and hence any attempt of doing so is futile.
Then, it goes on to propose a solution – well, if the equity markets cannot be predicted, why try? Simply invest at regular intervals to average out your buying cost!
A simple but elegant solution.
It works really well because the equity markets have had a long-term upward trend. Even if you buy something at a high price, there is a pretty good chance that after 10 years, the price will be even higher. The difference is your profit!
Savings has become more and more difficult with the advent of online transactions/debit cards/credit cards etc.
One has to fight the urge to spend in today’s world where everything it just a tap away.
In such environment, it is important that we do not lose focus from savings. It is savings that helps us save for a rainy day – a medical emergency or a financial milestone.
SIP in mutual funds have converted savers to investors.
SIP in mutual funds is very likely to earn you higher returns than bank deposits in the long term. This can make you richer faster and help you reach your financial goals with the help of mutual fund earlier!
These are probably the only two advantages of SIP.
Do not confuse the advantages of SIP with the advantages of mutual funds.
Today, I will share with you a revolutionary new method of investing in mutual funds.
Finpeg AlphaSIP (check it out here) is mutual fund investment method that leverages the power of machine learning.
This makes your mutual fund investments do more for you – our back testing shows that you can earn 3-5% extra if you invest via AlphaSIP instead of SIP.
Finpeg AlphaSIP deploys a dynamic asset allocation-based investment methodology.
While SIP is something that keeps you 100% in equity all the time, Finpeg AlphaSIP is smart and divides your portfolio between equity and debt – investing more in equity when the markets are down and investing more in debt when the markets seem expensive.
Now, market timing is something that has been thought to elusive. While this is true, there are a number of indicators that can fairly accurately predict the direction of the market in the coming future.
Finpeg AlphaSIP’s machine learning algorithm makes use of the trends of these indicators and helps you stay invested in the most optimal asset allocation.
Suppose the equity markets are very expensive – this can be inferred from indicators such as price to earnings ratio, price to book ratio, market cap to GDP ratio – the smart thing to do is to minimize your exposure to equity mutual funds. This is because history has shown time and again that these indicators mean revert.
On the other end of the spectrum, if the equity markets are cheap or inexpensive, the smart thing to do is to maximize your exposure to equity mutual funds. Again, if markets are down, they do not stay down for a long time. They eventually pick up and having a large allocation to equity mutual funds during such times will ensure that you take full advantage of the rally.
Finpeg AlphaSIP deploys a number of indicators to decide your asset allocation. They can be broadly classified as –
- Valuation indicators (PE ratio, PB ratio, Market Cap to GDP ratio)
- Interest rate outlook (Is the central bank increasing or decreasing policy rates?)
- GDP growth
- Economic activity indicator (Is economic activity increasing or decreasing around the world?)
All the indictors work together to advise the most optimal debt and equity allocation.
This helps us stay in equity mutual funds when they are expected to perform well and stay out of equity mutual funds when they are expected to perform poorly.
An SIP, on the other hand, provides none of these advantages. It is a simple method of investing which exposes you to the risk of equity mutual funds even when the risks are higher (when the markets are expensive)
An AlphaSIP journey is expected to be less volatile than an SIP journey. More importantly, due to the active portfolio management AlphaSIP is expected to generate greater returns than SIP.