Sindhu wrote in about a month ago inquiring about ICICI Direct’s Target Investment Plan (TIP) scheme and if it’s any better than the systematic investment plans that you normally have at other brokers, and of course ICICI Direct as well.
The way the Target Investment Plan works is that instead of specifying a fixed amount that will be used to buy mutual funds every month – you specify a target, a rate of return, and time frame in which you want to get to that target.
The TIP system will then alter your monthly contributions based on the current value of your portfolio. The example in the PDF that I’ve linked to above explains the mechanics quite nicely, so I’m going to use the same example here.
Suppose, you want to have a sum of Rs. 10 lacs after 7 years, and you decide on an expected rate of return of 12%. If this rate were to be uniform throughout the 7 years – you will have to invest Rs. 7,700 every month.
However, equity investments are inherently volatile and say at the end of the first month – you find that your first installment of Rs. 7,700 is only worth Rs. 7,000 now. The system will recalculate your next installment to find out what amount is needed now to reach your goal. In this case it is Rs. 8,400, so they will deduct that from your account and invest it in your mutual funds.
Similarly, if the portfolio value gains then they will reduce your installment with the newly calculated sum and use only that much money to buy your mutual funds.
This is an interesting concept, and I think you could do one of these in addition to your SIPs but I won’t be in favor of getting rid of SIPs altogether for this.
One reason for that is if the system determines that you are ahead of your target and reduces your mutual fund investments, then what happens to the cash that is spare – are you vigilant enough to invest it yourself in other equities or are you going to invest it in fixed debt instruments or will it just lie there in your savings account?
The second reason is that this system will add a layer of complexity to your investment process because I don’t think it’s possible to correctly ascertain how much money will be needed in the coming month especially with how volatile the stock market can get. So, that’s one more thing you have to keep track of.
The third reason is that while you can cancel the TIP – you can’t modify it so if you find out midway that you want to invest more or reduce your target then you will have to find another avenue to do that.
The fourth reason is that the success of this system is more or less to do with timing the market and as we know that doesn’t work very well most of the time. If it would, then you’d see mutual funds that make buy decisions based on P/E multiples do better than every other class of funds.
The fifth reason is that it’s a relatively new product, and you don’t want to put all your money in this without trying it out for some time and seeing how it works for you.
These were product specific thoughts, but if you look at this at a slightly higher level you’d see that what you want to achieve with this product is to invest more of your money in equities when the market is low (like it is today) and pull back from them when the market is high.
There is nothing that stops you from doing this yourself – if you have a few SIPs going – you can invest additional sums yourself when the markets are low – and the lack of a system is not preventing you from doing it.
It’s the uncertainty that surrounds the market when it’s down that prevents you from doing it, and that’s why you see people stop their SIPs or sell their stocks at a loss in times such as today. To that extent, this product will not be able to help you help yourself, and that’s something that you will have to overcome yourself.
In summary, I think this can be a useful product and can be tried out in addition to SIPs by choosing reasonably small targets over a shorter time frame to start with, but I wouldn’t go as far as to replace SIPs with them.