Why do we rush to the store when there’s a sale but refrain from investing when the markets fall? If you are wondering what the connection between the two is, think again. When stock markets fall, aren’t you buying at lower prices for the same stocks that were priced higher? Isn’t that what a sale is about?
Let’s draw a parallel here.
You walk into a store and see the prices much cheaper than what they usually are. It is quite possible that you doubt the quality of the product. What if they were trying to sell you low quality stuff? Is there a reason why the prices are low?
These are the right questions to be asking and more often than not, this fear surfaces even while making investment decisions. When you see the stock market fall, your faith in the instrument inherently goes down. Logic may tell you this is an opportunity, but your cautious self may tell you to stay away.
Now let me just tweak the scenario a bit.
You are walking into not just any store, but Nike, a brand known for its quality. You see discount boards everywhere, your heart lights up with joy. Here, the quality of the product is the last thing on your mind, because it is backed by the brand’s credibility. This changes everything, doesn’t it?
Similarly, in mutual funds, the fund manager takes the responsibility of picking right stocks that will survive the downfall. If you were to pick stocks by yourself, you’d have to weed out potential losers from potential gainers. You will then have to figure if a stock is a priced low because it is undervalued or the stock itself is losing value. This is when the game gets risky. So it is a fair thing if you fear picking individual stocks in a market fall; as it is hard to discern the good ones from the bad. But when you are with a good, consistent fund that has seen several ups and downs then your confidence in the fund’s ability to navigate such volatility is higher. Hence, you job is restricted to simply being in the market – at all times.
Doing a Systematic Investment Plan (SIP) is the best way to ensure this. SIP works even better when the market sees a correction, because then you will buying on lows – like you do in a sale. The table shows returns from SIP during different 5 year periods if you had invested in a diversified equity fund- Franklin India Prima Plus. Most of these periods were volatile ones and you can see that SIP helped deliver good returns on most occasions. Barring the one period from 2009, which was a low (after a 55% fall in the equity market), the rest of the volatile periods would have yielded well if you had run a SIP and not stopped it. In a period like 2010-15, SIPs did spectacularly well as 2011 was a falling year and the fund made the best of the situation.
SIP, as a method of investment, has proven to safeguard you from market falls by taking advantage of such falls. What you should be more concerned about is if your time period and risk appetite are in line with your choice of equity instrument. With that being the basis of your investment decision, refraining from investing because the market is falling will only be counterproductive. Rather, you should take advantage of the market fall and prop up your returns by making more investments or increasing your SIP (if your capacity to invest allows that).
The moral is that, don’t let the market spook you into getting off your investment track. A SIP will work in all market cycles. It will work exceptionally well when the market sees a correction. There is only one scenario when a SIP won’t work, that is when you stop it.