The majority of stock market investors often use mutual funds for long-term financial planning. Systematic investment plans (SIPs), which offer the additional benefit of rupee cost averaging, are a typical method. SIP is a passive strategy that does not rely on market timing to build long-term wealth.
That brings us to a pertinent question; should you exit equity fund SIPs at market peaks and re-enter at lower levels? The answer is an emphatic “No”. Persisting with a SIP for a longer period adds value.
Let us have a look at why you should not stop your SIP in a volatile market.
(i) Market Timing
A lot of investors have a tendency to time the market. Yet, studies show that a diligent investor using SIP outperforms a trader who times the market. One of the main advantages of SIP is that you don’t have to time the market. Below is a illustration which shows returns if you invested at the peak of the market.
(ii) SIPs can neutralize market volatility over time
The SIP makes regular investments in a fund on a specific date. The theory is that as prices increase, NAV provides the investor with greater value. The investor receives more units when markets are weaker. Because of this, SIP investors have a distinct advantage over lump-sum investors. SIPs allow time to work in your favor, therefore stopping the SIP runs counter to this fundamental idea.
(iii) Stopping SIPs in between means you lose the compounding edge
The power of compounding is most effective when you maintain your investment and reinvest irregular cash flows into the SIP. You can only do it if you sincerely pledge your long-term commitment to the SIP. The compounding advantage is lost if you stop the SIP in the middle, and the SIP won’t be able to produce the necessary target returns.
(iv) Long Term Returns
For long-term financial planning, SIP is preferable. SIPs have generated enormous profits over the past few years since they may enter markets at both low and high phases. You shouldn’t restrict your equity investments through the SIP mechanism to short-term financial objectives and monetary gains. Long-term returns from stocks are capable of being adjusted for inflation. As a result, when you stop your SIP during periods of market volatility, you miss out on the bigger picture.
(v) When you stop SIPs, you lose the regular investing discipline
SIP underscores that discipline creates wealth. SIPs impel you to do two things. Firstly, SIPs force you to look at savings as a target rather than residual item and budget accordingly. Also, inflows are periodic so SIPs help to synchronize outflows with inflows. By terminating your SIP in between, you lose out on the discipline advantage.
Lets understand this with an example:
Investor A started a monthly SIP of Rs 20000 in 01/01/2010 in Nifty Index and continued till today. His investment value/corpus today (27th feb, 2023) will be approximately 67.7 Lakhs while the money he had invested was only 31.6 Lakhs.
Investor B on the other hand, started the SIP in same month 01/01/2010, but in the market crisis of 2015, he stopped it. His investment value/corpus today (27th feb, 2023) will be around Rs 36.9 Lakhs, while the money he had invested was Rs 12.4 lakhs.
Comparing the two examples, we can safely say that by investing a few more lakhs in the falling market while continuing SIP till today, Investor A has made an additional profit of around 30 lakhs.
Conclusion
The flipside of stopping your SIPs when markets hit the peak is that it might take a lot longer for you to re-enter equity markets.
Purchasing additional stocks when the market declines may have hidden benefits. Yep, you heard correctly. Investors that take advantage of opportunities know that it is advantageous to purchase stocks or funds at a discount (a bear market) and then sell or redeem them when the market is performing well. Stick to your asset allocation plan and take advantage of the current market downturn to make investments. Please keep in mind that this bear phase won’t last forever; you need to have a diversified portfolio of your investments.
Secondly, it is futile to time the market. Today, the Nifty is around 17,800. Compare this with the peak of 2000, of around 1,712: it’s almost a 10.4-fold gain, point to point. This shows that long-term investing is a reality, not a myth.
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References: valueresearchonline.com, Industry’s Publications, News Publications, Mutual Fund Company.
Disclaimer: The report only represents personal opinions and views of the author. No part of the report should be considered as recommendation for buying/selling any stock. Thus, the report & references mentioned are only for the information of the readers about the industry stated.
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