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Simple solution to invest smartly

Lakshmi Iyer, CIO (Debt) and Head Products, Kotak MF

9th January 2017

In a nutshell

Kotak MF's Flex SIP / STP provides a simple solution to invest smartly: each time the Nifty 50 PE goes below 15, an augmented instalment will be invested, with a default set at 3x, to encourage making the most of bargain prices. This is indeed a good addition to the suite of options that enable investors to buy smartly. Are there opportunities for fund houses to also enable investors to sell smartly? Can switches be triggered from equity funds to low risk products at predefined high valuation levels? What are the pros and cons of this approach? Lakshmi takes us through Kotak MF's perspectives on such solutions.

WF: How does your Flex SIP/STP work and how is it different from other flex products in the market?

Lakshmi: Flex SIP/ STP is an add on to our own SIP/STP family. Here, instead of a fixed amount per month, the facility offers you the flexibility of increasing your SIP/STP amount based on market PE (price earnings multiples)

It is not that there are no such options available in the market today. We have just simplified the PE band to a threshold of 15 PE and the default amount at 3x. The investor also has the option of specifying his/her on own amount as desired.


WF: While you have an option to increase allocation when valuations are low, why did you not want to also have an option to decrease allocations when valuations go into expensive zone?

Lakshmi: In case of a normal SIP, the discipline lets the investor invest a fixed sum of money in the market. By reducing this amount, we would be going below his desired threshold amount. However, when markets correct, there was a need felt to offer the flexibility of increasing allocations as deemed fit.

We are a bargain hunting nation, hence the augmenting option we thought would be appropriate.


WF: Is this facility available across all your equity and balanced funds?

Lakshmi: Yes. It's available across all our open ended equity schemes

WF: With 3x as default when valuations drop, is there a possibility of instalments not getting invested due to lack of funds in the account, especially for SIPs? What happens in such situations?

Lakshmi: This is the precise reason, why we have given flexibility at the hands of the investor to choose a higher amount as per their discretion. Even if one goes with the default i.e. 3 times we have an additional message alert facility 10 days prior informing the investor of the impending amount. This would ensure that the investor is not caught unaware about the sudden higher debit from his account. Also, just like in normal SIPs, skipping upto 3 instalments doesn't terminate the SIP.

Hence there is sufficient time, intimation to the investor to ensure the instalments continue

WF: Some advisors opine that while flex SIPs based on different algorithms are indeed a step in the right direction, what will also be useful is to automate (with client consent) movement of accumulated SIP corpuses into lower risk funds at certain high valuation points and vice versa at low valuation points. This will automate asset allocation at a portfolio level for retail investors who may not have access to advisors. Is there merit in this suggestion? Is such a solution possible to construct at a fund house level?

Lakshmi: Advisors play an important role in devising asset allocation strategies based on individual clients' risk appetite and rebalance it from time to time where necessary. An automated asset allocation may not be possible in the immediate future as it would be most likely based on fewer variables. Although it will be useful tool as an entry into an asset class, it may not be a prudent tool for exiting from long term asset classes such as equity. There is risk of the automated process attracting short term capital gains tax and exit load too at times. However, we are continuously experimenting with various products and facilities which could help our investors in reaching their financial goals and would continue to come up with innovative solutions.

WF: What are the ways in which fund houses can create solutions to help investors sell right, in addition to the current efforts around buying right?

Lakshmi: Fund houses currently have valuation guides for equity which also has general asset allocation guides between equity and debt. But a sell decision is not that simple as it would also be dependent on individual investor's goal, current appreciation, current allocation and cash requirements alongside taxation impact. As reiterated earlier, advisors would play an important role in such decisions.

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