How Trigger SIPs can affect your investment strategy

Trigger SIPs give investors the flexibility to time their investments – certain market conditions act as triggers that activate or deactivate investments. Many asset management companies offer investors two trigger options that act when the market rises or falls to a certain level. Some people use this strategy to get more value by investing when the market is down.

In this article, we explore the limitations of Trigger SIPs and why they are not always the ideal investment strategy.

Common Triggers

Many investors in the market employ various SIP triggers to enhance their investment strategies. A common option is the Price Based Trigger, where the amount of the SIP increases by a certain percentage when the price of the asset or the Net Asset Value (NAV) of the fund falls by a corresponding percentage. Additionally, the Lump Sum Trigger is another variation on this approach, allowing investors to make a lump sum investment when the asset’s price declines specifically. Another popular option is the Value Trigger/PE (price-to-earnings-based) SIP, which monitors the Price-to-Earnings (P/E) ratio of benchmark indices such as Nifty or Sensex. When this ratio falls below a predetermined threshold, investors will increase their SIP contribution by a pre-defined amount.

Case analysis

The base case is about a hypothetical investment where one starts a monthly SIP of it ₹10,000 in Nifty50 TRI on 1 January 2000 and continues with this SIP till 1 October this year. This means a full investment of it ₹28.6 lakh in 23 years. As of October 30, the investment grows to ₹2,06,40,238.1, which represents a portfolio XIRR (internal rate of return) of 14.201%. The total results are 622%.

This example serves as a benchmark against which we can compare and evaluate different investment strategies or variations.

Case 1 investigates the effects of SIP triggers under specific conditions. In this case, whenever the Nifty index falls monthly by 5% or more, the SIP contribution for the following month is doubled. The 23-year SIP, same as the base case, results in a fully invested corpus of ₹32.3 lakhs. By the end of October, the investment grows to ₹2,45,60,840.66, implying a portfolio XIRR of 14.239%. This approach resulted in a remarkable 660% total return – an increase of ₹39,20,602.55 in the final corpus as compared to the base case. However, the thing to note here is that the XIRR portfolio remains almost the same.

Under Case 2, whenever the Nifty index registers a monthly decline of 10% or more, an additional lump sum investment will be made ₹1 lakh is incorporated in the investment strategy, resulting in a total investment ₹42.1 lakh in 23 years. By the end of October 2023, the investment had increased ₹3,78,17,528.59, resulting in a Portfolio XIRR of 14.140%. The strategy had an impressive total return of 798%, which translated into an increase ₹1,71,77,290.47 in the final corpus as compared to the base case. This case illustrates the potential impact of adjusting investment decisions in response to specific market conditions, but the XIRR Portfolio remains the same.

In Case 3, whenever the Nifty PE (price-to-earnings) ratio falls in the 1st Quarter, the SIP amount is increased by 20% for the coming month. As a result of this strategy over 23 years it became a complete investment corpus ₹29.92 lakhs. By the end of October, the investment had increased ₹2,25,69,645.24, with a portfolio XIRR of 14.31%. Although this strategy represents a different approach to trigger-based SIPs, it is interesting to note that XIRR’s portfolio does not change significantly here either.

Watching: Despite using different trigger-based SIP strategies, the XIRR portfolio does not show significant variations. It emphasizes the notion that an investor looking to improve his bottom line should consider investing during a market downturn. Trigger-based SIPs may not be as effective if the incremental capital invested is not significant enough to lower the average purchase cost of the asset or fund.

“Trigger SIPs are going against the idea of ​​the SIP. SIP is meant to encourage investors to invest in a systematic manner by ignoring market movements. SIP is a behavioral hack to remove the fear of investing and free the investor from the folly of mistaking the market. SIP trigger tries to think that SIPing is not enough and that you have to waste your SIPs even. I think this is a regressive investment idea even though it might be a good marketing idea. We have seen such degradation of the SIP idea in other forms as well – for example choosing the “best” day for a SIP in a month based on past years of return data,” said Ravi Saraogi, co-founder of Samasthiti Advisors . .

Nirav Karkera, head of research at Fisdom, believes that the key proposition of SIPs lies in the concept of rupee cost averaging over time. Basic SIP is designed as the ideal approach to accumulate units over the long term. However, over time, equities also witness cyclical downturns. Recognizing such cyclicality allows investors to optimize investments without taking too much risk or deviating from the current investment plan.

The returns on investments will not be affected if the SIP starts at long term market highs or lows

Investments made during the 2008 market peak and 2008 market bottom both yielded similar XIRR portfolio values ​​of 12.522% and 12.79%, respectively, by October 2023. Similarly, investments made during during 2020 market peaks and troughs are XIRR Portfolio values ​​of 13.549% and 14.92%. These figures show that over longer investment periods, the choice of entry point has a relatively small impact on returns.

However, it is essential to recognize that the situation can be very different in the short term. Market timing during shorter periods can significantly affect returns, as seen in the differences between market peak and market bottom scenarios for 2020, which show distinct differences in the XIRR portfolio. The above data highlights the importance of considering long-term investment goals and staying invested through market cycles to achieve consistent results, while short-term market timing can introduce more variation in results.