Lower SIP Limits Unlock New Investment Opportunities For First-Time Investors

SEBI’s decision to lower the minimum investment value in mutual funds, specifically for Systematic Investment Plans (SIPs), to Rs 250 from the existing Rs 500, is a welcome move that is expected to attract more Indians to the financial markets. With a lower investment threshold and the automated, regular nature of SIPs, these first-time investors will not face the common dilemmas of having limited capital to invest or timing the markets.

However, they are still likely to face the conundrum of choosing between active and passive funds.

Active funds are a type of investment fund in which a professional fund manager or a team actively manages the portfolio by making decisions about which securities to buy, hold or sell. These funds can adapt to market conditions, providing flexibility. Active management offers the potential for high returns, but it may also carry higher risks due to a heavy reliance on managerial skill and judgement. Passive funds replicate market indices by following a set strategy without active management. They offer low costs, reduced managerial bias and minimal risk of underperformance, making them ideal for investors seeking low-volatility portfolios.

Smart beta funds are a type of investment strategy that combines elements of both active and passive investing. They aim to outperform traditional market-capitalisation-weighted indices (such as the Nifty 50) by using alternative weighting schemes or factors, while maintaining the cost-effectiveness and transparency of passive funds, giving investors the best of both worlds. Unlike traditional index funds, smart beta strategies focus on specific factors such as low volatility, quality, momentum and value, offering better risk-adjusted returns at lower costs.

Factor cyclicality via smart beta funds refers to how different investment factors—such as value, momentum, quality, size and low volatility—perform across various stages of the market or economic cycle. Smart beta funds, which use rules-based strategies to target these factors, enable investors to capture their unique return and risk characteristics. During bull markets, momentum-based smart beta funds might outperform due to their focus on stocks with upward price trends, while low-volatility funds may show greater resilience. Funds focusing on low-volatility or quality factors tend to perform better, or lose less, than broad market indices during bear markets. Value-based smart beta funds could potentially outperform if the correction leads to undervalued stocks becoming more attractive.

Unlike active funds, smart beta funds do not carry risks related to stock or fund manager selection, as they follow rules-based strategies to build the portfolio. Moreover, smart beta funds are generally cheaper than active funds but more expensive than passive funds, making them ideal for investors targeting higher returns while remaining cost-conscious.

As of early 2024, smart beta funds in India remain relatively small compared to global figures. While global smart beta ETFs managed approximately $1.56 trillion by early 2024, India’s smart beta AUM is still under `25,000 crore (around $3 billion). This represents roughly 0.2% of the global market share, which leaves great scope for the growth of this category of funds. The influx of new investors, drawn in by the lower SIP threshold, can consider these funds for better risk management and potentially higher returns.

Investors can invest in smart beta indices either through the ETF route if they have a Demat account or through smart beta index funds if they prefer the mutual fund route and systematic investments.

Disclaimer: Mutual fund investments are subject to market risks and do not offer guaranteed returns. The value of investments may go up or down based on market conditions.

The past performance of the mutual funds is not necessarily indicative of the future performance of the schemes. Please read all scheme-related documents carefully.

Disclaimer: The Views are Personal and not a part of the Outlook Money Editorial Feature

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