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Why you should continue your SIP in up and down markets

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In the first part of this article, How to invest in equity mutual funds in volatile markets – Lump Sum, we discussed that, markets are likely to remain volatile in the near term due to a variety of global and local factors. We also discussed that it is futile trying to time the market while making lump sum investments. In volatile markets, STP is a good strategy for deploying your lump sum funds in equity mutual funds in a systematic way. In this article, we will discuss about Systematic Investment Plans (SIP).

Systematic Investment Plan or SIP is an investment strategy, where a fixed amount of money is invested in mutual fund schemes of your choice at a regular frequency, usually monthly, through auto-debit (ECS) from your bank account. The SIP instalment, every month (or any other frequency), is used to purchase units of the mutual fund scheme, based on prevailing Net Asset Value (NAV) of the scheme on each SIP date. If NAVs are high, less number of units will be purchased and if NAVs are low, higher number of units will be purchased. Over a period of time, since markets and NAVs thereof are volatile, your cost of purchase will average out – Rupee Cost Averaging. Rupee cost averaging negates the need to time the market.

But before we proceed further, let us read the advantages of SIP investment

In the past, most investors in India had the herd mentality – they would jump to equity bandwagon in bull market and abandon equity in bear market. But investors are more mature now – they think about valuations, volatility etc. One of the criticisms put forth against SIP is that, in rising markets (bull markets), investors through SIP are purchasing units at higher and higher cost - at the market peak you are basically investing at very high NAV. At the current level, the Sensex is just about 4.5% short of its all time high. The critics argue that, the mantra of success in stock market is buying low and selling high – when you are buying at market highs through SIP, then you are not following the mantra.

There may be some validity in this argument. After all, there is no perfect investment strategy – every strategy has its strengths and weaknesses. In the case of SIP, however, the benefits far outweigh the limitations. For the sake of argument, let us assume that, it may not be beneficial to invest at market highs, but what is the alternative? Should you stop your SIP and wait for market to correct? Before you go ahead and stop your SIP, ask the following questions.

  • When will the market correct?
  • Can the market go up before correcting? If yes, how much can it go up further?
  • If and when the market falls, how much will it fall? Will it fall substantially below the current peak?
  • At what level, do you want to buy?
  • If the market keeps falling, will you be ready to buy?

The answer to all of these questions is unknown because, as discussed in the first part, there are uncertainties in the market and it is expected to remain volatile – but there is no clear trend in the market right now. Waiting for market to correct is trying to time the market and trying to time market is simply guessing. Any guess is 50/50 – if it turns out to be right then you benefit, but if it is wrong then you lose out.

Your financial planning should not be dependent on whether your guess in right or wrong. Systematic investing is a better approach to financial planning than guessing. In fact, systematic investing frees you up from the stress of trying to guess what will happen in the future. There can be three possibilities for the market going forward – (a) the market may go up further, (b) the market may go down or (c) the market may remain range-bound with or without bias till we get more clarity. Let us now discuss, why you should continue your SIP in different market scenarios

Rising Market

If you continue with your SIP investment, you will be buying units of mutual funds at higher and higher prices. For some investors buying at higher and higher prices goes against the stock market mantra of buying low and selling high. This mantra, however, is not easy to implement. For long term SIP investors, this mantra is modified to, buying high and selling even higher. As discussed, in the first part of this article, even if you invested at the stock market peak of 2015 (before the fall), you would have still got decent returns in three years. When investing in SIP in rising markets, each SIP instalment will be invested at a price which is lower than the peak of the rising market (bull market). So you always stand to benefit in the long term because even if the market falls in the future, it will eventually recover and make new highs (higher than the current high).

Falling Market

Let us now discuss the second scenario – a market correction or even a bear market. Bear market is stressful for all investors, including SIP investors because you are likely to see your investment falling in value every week / month, even if you keep on investing through SIP. But if you keep emotional stress aside, then falling market is the ideal condition for long term SIP investors. As an existing SIP investor, a correction or bear market is always beneficial for you; you will buy units of mutual funds at lower and lower prices in a bear market or correction. Continuing your SIP in bear markets will usually give you fantastic results in the long term. Take two examples – in one, an investor continued his / her SIP in the financial crisis of 2008 and another, investor who waited for the market to recover before beginning his SIP.

In 2008, the market started falling in January and continued falling for the next 15 months – the Sensex fell more than 60%. Let assume you started a monthly SIP of Rs 3,000 in January 2008 in Aditya Birla Sun Life Advantage Fund and continued till today. Your investment value today (April 25, 2018) will be over Rs 9 Lakhs, while you made a cumulative investment of Rs 3.7 Lakhs.

In the second example, let assume you waited till the middle of 2009 for market to stabilize before investing in the same fund. Suppose you started a monthly SIP of Rs 3,000 in July 2009 in Aditya Birla Sun Life Advantage Fund and continued till today. Your investment value today (April 25, 2018) will be around Rs 6.9 Lakhs, while you made a cumulative investment of Rs 3.2 Lakhs.

Comparing the two examples, by investing just around Rs 50,000 in the bear market you made an additional profit of more than Rs 2 Lakhs. The benefit of investing in falling market should be obvious and all the more reason for continuing your SIP in high market, because bear markets inevitably follow bull markets.

See the SIP returns of Aditya Birla Sun Life Advantage Fund

Range-bound Market

We have so far discussed, why continuing your SIP is beneficial both when the market is rising and falling. Let us now discuss the third scenario, where market can remain range-bound for a period of time. Stock markets, especially here in India rarely remain range-bound over a long time-frame like 1 or 2 years. In India, the stock market mostly rises every year, interrupted by intermittent periods of corrections or bear markets. Even when the market is range-bound over a 1 year time-frame, it can be quite volatile in the interim.

2013 was the example of a range-bound market – essentially flat on a year or year basis, but there was great volatility on a month to month basis. 2018 may very well turn out to be a year like 2013, because there are certain similarities in the prevailing macro conditions –concerns about US Federal Reserve monetary policy actions, rising crude prices and upcoming Lok Sabha elections in both the years.

Even in the scenario of range-bound market, SIP works wonderfully well, because equity markets are intrinsically volatile. By investing on a systematic / regular basis every month, you can take advantage of the volatility through Rupee Cost Averaging of purchase price of mutual fund units. Through Rupee Cost Averaging you can enhance your rate of returns over a long investment horizon.

Conclusion

We have discussed that, SIPs are win-win-win in all the three scenarios – rising market, falling market and range-bound market.In SIP we are not looking to invest at the best price (NAV); we are only looking to invest at an average price. If you are looking to invest at the best price then you are trying to time the market which, as we discussed earlier, is close to impossible and is likely to cause you stress, not to mention financial loss (opportunity loss or actual). Through Rupee Cost Averaging, you are not at a disadvantage irrespective of when you are investing and since, equity is best performing asset class in the long term you are likely to get good returns.

While on the topic of SIP, we are curious if you have planned a SIP for you. If not, our SIP Calculators can help –

How to become a Crorepati

Target amount SIP Calculator

SIPs with annual increase




Mr. Ajay Kumar Jain, M.Sc, Chairman And Managing Director
Being the Chairman And Managing Director, he focuses on holistic investment planning and wealth management and tries to make investment planning simpler for retail and HNI investors. Investor education is one of the prime things that Mr. Ajay Jain focuses on as he believes financial education is the foundation of successful investing. With over two decades of experience, Mr. Jain has made a mark in the Indian mutual fund industry due to his compassion and sheer hard work.

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