How to set up SIP in ETF

by Manshu on March 15, 2010

in ETF

set SIP for ETF

I wrote about the Quantum gold savings fund yesterday, which is a fund of funds, and said that I couldn’t think of a situation in which I would want to invest in this fund. That was because it is a fund of funds that simply invests in another ETF that I can directly buy myself.

In that post I asked if you could think of any reasons of getting into such a fund, and I got an interesting comment about investing in this fund as an indirect way to set up a Systematic Investment Plan (SIP)  on an ETF (clever thinking).

This is something that I think a lot of people will be interested in because I can see a lot of interest in setting up SIP on ETFs from Indian investors.

I have covered this topic earlier and I thought I will do a quick post on this again, because since the last post I have got two comments that explore new ways of doing this.

And also because I know that a lot of you are interested in setting up SIPs on ETFs, but there is no direct way of doing this. There are a few indirect ways (which were covered here earlier) though.

Here are five such indirect methods:

1. Kotak’s Auto Invest: Kotak has a plan called “AutoInvest” that in an online trading account based on systematic investment planning  in Gold ETFs, equities and mutual funds.

2. Set up reminders with your offline broker: If you trade using an offline broker – you can tell them to remind you by giving you a call at a certain day of the month, and remind you to place the trade.

3. Set up reminders in Outlook or Gmail: You can set up reminders using Outlook, Gmail or any other tool that reminds you to invest at a certain day of the month.

4. Buy a fund of funds that owns ETFs: As stated in the comment in yesterday’s post – you can set up an SIP for a fund of funds that invests in a particular ETF you are interested in – and that gives you an indirect way of getting into a SIP for an ETF.

5. Value Averaging Investment Plan (VIP) from Benchmark funds: This is an idea given by another commenter on the earlier post. This product from Benchmark is akin to set up an ETF – I am not sure how effective this is because I haven’t used it myself or done any great deal of research on it, but it does give another option to investors.

All these methods have pros and cons and you should evaluate them in earnest before getting into any of them. For example, if you are thinking of setting up a SIP for a fund of funds – you need to keep the following factors in mind.

1. Expenses of this fund of funds: Most fund of funds charge you dual fees because they charge you their own fee, and then you end up paying the fee of the funds they hold, so in effect you end up paying twice.

2. Transaction cost of the fund of funds: When you think about setting up a SIP through a fund of funds – what is apparent is that you won’t end up paying monthly commissions to buy the ETF yourself, and that is certainly a saving. However, beneath the surface – your fund of funds must also incur transaction costs while buying the underlying ETF. Think about this factor when comparing the cost between the two.

3. Allocation: If you buy ETFs worth Rs. 50,000 every month, then you know that your 50 grand has gone into the ETF. But fund of funds may not always invest 100% of the money in the underlying fund. They may keep a part of it as liquid holdings in order to cater to redemption and such.

These are some factors that you need to keep in mind while evaluating a fund of funds for setting up a SIP instead of just buying the ETFs directly. Figuring this out on your own will be overwhelming for most, so you can take a shortcut and compare the returns on the fund of funds and ETF after a period of say six months or a year, and see how well both correlate. If there is a lot of difference between the two returns then that means that this fund of funds is not as good a proxy as you initially thought it to be.

So, there you have it – some indirect ways of setting up a SIP for an ETF, and some things to think about before you do it. Let me know what you think about these and any other ideas you have.

Photo by Sergei Golyshev

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