Flex SIP
A SIP variant that allows the instalment amount to vary each month based on a pre-set valuation model — typically investing more when markets are undervalued relative to historical averages and less (or nothing) when markets are expensive.
Flex SIP, sometimes called Valuation-Based SIP or Dynamic SIP, was a product innovation introduced by select AMCs and fintech platforms to address the widely discussed limitation of plain SIP — that it invested equal amounts regardless of whether markets were cheap or expensive at that point in time.
The underlying philosophy drew from Benjamin Graham's concept of value averaging and the observation that the P/E ratio of Nifty 50 had historically oscillated between bands that correlated reasonably with subsequent five-year returns. A Flex SIP formula might state: when Nifty 50 trailing P/E was below 15, invest 2x the base amount; when between 15 and 20, invest 1x; when between 20 and 25, invest 0.75x; and when above 25, invest 0.5x or skip entirely.
From an implementation standpoint, Flex SIPs posed operational challenges. NACH mandates in India were fixed or variable-amount, and variable mandates required the bank to process amounts that changed each cycle. Some AMC platforms shifted to net-banking or UPI AutoPay (NACH 2.0) to handle variable amounts more cleanly. Platforms such as Kuvera and Groww offered Flex SIP features with customisable valuation parameters.
The empirical evidence on Flex SIPs in Indian markets was mixed. In backtests that included the 2008-09 crash and the 2020 correction, Flex SIPs outperformed regular SIPs by 100-200 basis points in XIRR over a decade. However, the outperformance depended heavily on the investor maintaining sufficient liquid reserves to deploy during expensive markets and actually deploying the reduced amounts rather than diverting them to consumption.
AMFI and SEBI did not prescribe a standard definition for Flex SIP, which meant each AMC or distribution platform defined its own valuation metric and band structure. Investors were required to read the terms of the specific Flex SIP product carefully before opting in.