SIPs have long been praised for their disciplined approach to investing, especially in mutual funds. Traditionally, Systematic Investment Plans (SIPs) allow investors to put a fixed amount of money into selected mutual fund schemes at regular intervals, regardless of market conditions. This approach benefits from rupee-cost averaging, where more units are bought when prices are low and fewer when prices are high, effectively averaging out the investment cost over time.
However, the financial landscape is constantly changing, giving rise to a more nuanced form of SIPs called Trigger SIPs. This variant of SIPs introduces a flexible mechanism tailored to leverage market conditions to optimize investment returns.
What is a Trigger SIP?
Trigger SIPs differ from traditional SIPs in that they allow investors to set specific conditions or ‘triggers’ based on market events that must be met for the investment to occur. These triggers could be related to specific stock price movements, index levels, or other economic indicators. When these predefined conditions are met, the SIP is automatically triggered, enabling investors to buy at lows and sell at highs, thereby maximizing potential returns.
How Do Trigger SIPs Work?
Think of a Trigger SIP as an alarm clock for your investments, where you can decide when to ‘wake up’ your money and put it to work. This can be based on various types of triggers such as –
- Price-based triggers: Where an investor sets a specific price level as the trigger.
- Event-based triggers: Where particular market events or economic indicators serve as the trigger.
For example, if a Trigger SIP is set up with a price trigger, it could be activated when a mutual fund’s NAV falls to a certain level. Conversely, if the trigger is event-based, investment could occur when significant market corrections happen, as predetermined by the investor.
The Impact of Trigger SIPs on Investment Strategy
Trigger SIPs can significantly impact an investment strategy by allowing more timely investments. For instance, if the market experiences a significant downturn, a Trigger SIP could double the investment amount for that period, taking advantage of lower prices to buy more units.
Scenario Analysis: Performance of Trigger SIPs
Let’s consider a hypothetical scenario to understand the Trigger SIPs:
Baseline SIP:
An investment of Rs 1,00,000 in an equity fund SIP from January 2000 to October 2023, resulting in a corpus of Rs 2.64 crores by October 2023.
Trigger SIP Scenario:
If the same SIP were set with a trigger that doubles the investment during a 5% market dip, the resulting corpus could potentially increase, assuming more units are bought at lower prices.
However, multiple analyses suggest that while Trigger SIPs can optimize returns in specific scenarios, their long-term effectiveness compared to regular SIPs might not significantly differ due to the market’s volatile nature. Essentially, the periodic investment in mutual funds tends to average out the purchase cost over time, regardless of market conditions at the point of investment.
Should You Opt for Trigger SIPs?
Trigger SIPs are suitable for investors who have a good understanding of market movements and can set intelligent triggers based on sound analysis rather than emotion. They offer a more active investment approach but require more attention and a better understanding of market conditions.
For novice investors or those who prefer a hands-off approach, traditional SIPs might be more beneficial. These plans capitalize on the market’s long-term growth potential without the need to monitor and react to short-term fluctuations.
Conclusion
In conclusion, Trigger SIPs present an innovative way for seasoned investors to potentially enhance returns by making strategic investments based on specific market conditions. However, for those new to investing or who prefer a more conservative approach, sticking with traditional SIPs might be advisable, as they offer a simpler, time-tested pathway to wealth accumulation in the equity market.
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. The information is based on various secondary sources on the internet and is subject to change. Please consult with a financial expert before making investment decisions.
