Smart SIP & Market Timing

Systematic Investment Planning also called Dollar Cost Averaging is a age old formula where one invests a equivalent sum of money on a specific date regardless of where the market / stock / fund is trading at. The idea is that by investing in all kinds of market (Bull / Bear and the Flat), you get returns that are equal or even better to the funds own returns on the long term.

If you have been reading my blog for some time, you know that I have touched upon SIP and its disadvantages many a time. To me, SIP is a good way to save, but if you are looking towards saving for a Goal, you need to understand that its just a game of probability – you may or may not be able to get the money you desire when you desire.

When you invest in a Recurring Deposit, you know that at the end of the period you will definitely get X rupees. No such guarantees out here though since you cannot really predict where the market will be when you need your investment back. If markets are high, you would get way more than what you would have expected but on the other hand if you require the money when markets are down, returns could be abysmal.

A few months back, Nilesh Shah, MD of Kotak Mutual Fund tweeted out the following

Time to move from SIP to smart SIP whereby one can buy more when valuations are low and less when valuations are high.

— Nilesh Shah (@NileshShah68) January 28, 2016

The tweet though came to my notice only yesterday and I commented that Smart SIP is nothing but Timing the Markets. In reply to my Tweet Vikaas M Sachdeva, CEO of Edelweiss Mutual Fund replied saying that Edelweiss did offer one such and have called it Pre-Paid SIP (More details here)

The concept of buying more when markets fall is simple and looks logically right, but does data prove the idea to be one worthwhile to implement? I tested out using Nifty Total Returns Index comparing a monthly SIP (end of month investment) to Investing based on Triggers as per Edelweiss.

The results are not very surprising. While you would have ended up investing more if you had invested every time Nifty fell by 0.50% or more versus say investing every month or when markets fell by 2% or more, the returns are pretty close to one another.

In other words, if you had invested in a simple SIP, you would have got similar returns versus a strategy of buying whenever markets fell by a pre-determined amount.

The reason is not hard to find – Market Timing doesn’t mean blindly buying every time market falls.  So, lets try some variations. What if I bought every time the trigger above happened but only if the Nifty Total Returns Index is aboev the 200 day EMA.
 Once again, the returns leave much to be desired. Only in case of falls above 2% do we see some kind of advantage but still is that good enough?

But in a way, the strategy is logically wrong since we aren’t buying when markets are cheap (which happens when they are falling). The reason SIP works is because they buy in cheap markets as well as expensive while we have ended up buying only in expensive times. So, lets test out what would be the returns if I bought every time the trigger happened but with the filter of Nifty Total Returns Index trading below its 200 EMA.

Once again, the results aren’t very different from what we have seen above. Even buying only in bad times gives us returns which are slightly higher but not much than what blind sipping would do.

Another strategy would be to use the “Value Averaging” concept that is outlined in the book by  Michael E. Edleson but that is for another day.

Every trader and investor tries to time the market using tools such as Value / Growth / Momentum. But very few are able to achieve risk adjusted returns that is worth the time and money invested in the venture. If you want to use market returns for fulfilling your goals, you will need more than a simple SIP.