Are you looking at your funds’ one-year returns and wondering if something is wrong? The last you saw the returns chart, say December 31, 2012, most equity funds delivered 30%-plus one-year returns. You see your funds’ one-year chart now and they are in low single digits or even negative.
How can the return picture change so dramatically in three months? – you ask yourself and suspect your fund of slipping down the returns chart.
Now, this is often a trigger for many of you to conclude that your fund is not doing okay and stop the SIPs. And there begins your woes.
Stopping SIPs, unless you know your fund is a definite underperformer, can harm your portfolio. That is to putting it mildly. If you were saving for a goal, then stopping SIPs can be short of being disastrous for the following reasons:
– One, you lose out on the best periods to average your costs, when the NAV is trending down
– Two, you would stop installments thereby upsetting the whole time frame over which you intended to save for the goal. In all likelihood, you would not have invested elsewhere immediately and hence effectively postpone your goal.
Here are couple of examples simply to illustrate how your portfolio suffers when you stop your SIPs for a while. In this example we take two scenarios – SIPs of Rs 1000 each started in July 2007 and continuing till date and another scenario when you stopped SIPs from July 2008 (when the market crash worried you to stop investing) and started again in July 2009 after you got a clear sign of revival. We chose a diversified fund and mid-cap fund merely to illustrate the level of impact.
Look at the difference in yield in the table below. In a diversified fund like Quantum Long Term Equity, you would have lost about 4 percentage points. In a mid-cap fund like SBI Emerging Businesses, where NAVs tend to fall more sharply, you would have lost as much as 6 percentage points.
In fact, between December and now, SBI Emerging Businesses has shed about 12% of its NAV. Don’t be shocked. The BSE Midcap index has lost 14.5%. Your fund would be quietly averaging at lower levels now. Disrupting it would mean losing out like we just illustrated. The stock market, with its currently weak earnings fundamentals and economic growth besides an upcoming election year, is likely to see enhanced volatility. That means markets and NAVs can see-saw. While we are not suggesting that you could have an opportunity like 2008-09, even a shorter period of volatility is bound to help your SIP process.
So, when should you be looking at stopping SIPs?
First of all, do not stop SIPs altogether unless you no longer wish to invest. If you stop in a fund, ensure you are starting SIPs in another immediately. Secondly, avoid looking merely at your standalone fund returns to conclude that your fund is under performing. Look at the benchmark index, then look at peer funds and category average. It is quite likely that the market is under performing.
But if you compare a mid-cap fund with a large-cap fund, it may not help, especially in a market like the present one. Large-cap index Sensex fell by 3.5% year to date but BSE S&P Midcap fell 14.5%. That means your mid-cap funds or even many dividend yield funds with higher exposure to midcaps would have fallen more.
Thirdly, 2-3 months is too short a period to conclude a fund is poor even if it underperforms its index or category average. Fund underperformance takes not less than 6-9 months to start showing up. Temporary blips are bound to happen if a call ot two goes wrong (and it is bound to, for any fund). That should not cause panic in a long-term wealth creating process. Keep track of fund ratings in such funds, for any steep slippage (say from 4 or 3 to 2).
If you are still confused, request your advisor to do a quick reality check on your portfolio.
Once you are convinced that nothing is wrong with your fund and the market is at fault, you may be tempted to actually buy more on dips. But how can you time this? It is, after all, in hindsight that we know a market low. Still, if you wish to, you can use some simple tools in your FundsIndia account to invest more on dips and benefit over and above your SIP averaging. Watch out for this in our next blog post.
Until then, ‘SIP’ equities well. It’s one of those years that affords a chance to buy on dips. Don’t lose it.
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