With markets falling since February, worry over further corrections may tempt you into stopping your SIPs. But this is not the time to stop SIPs. Why?
For a SIP to be effective and deliver the full impact, it must run through correcting market. Since 2014, markets have more or less been trending higher. We have had very brief corrective periods since then. When markets are trending higher, your SIP investment has been made at higher and higher levels, i.e., your average investment cost is rising. So how do you bring this down?
By investing through a correcting market. Because you’re buying at lower levels, it can bring your costs down. You need to run it through the corrective period and not back out quickly. So, in stopping a SIP during falling markets, the opportunity to bring costs down slips out of your hands. Profits and thus returns are maximised only when costs are minimised. This is the time to continue SIPs to bring down your cost.
Consider the period from January 2010 to March 2018 and a monthly SIP of Rs. 1,000. This is a good 8-year period. Now, let’s say you stopped investing in the downturn of 2011; assume you waited until the correction really got underway in March 2011 and you waited until the pick-up in mid-2012. That means you did not invest in just 15 months out of nearly 100. Here’s how much you would have lost for every Rs. 1,000 in SIP, taking some key equity funds.
|Fund||Without stopping SIP||With SIPs stopped from Feb 2011 till May 2012||What you lost|
|Total amt. Invested||Total value||Avg. cost per unit||Total amt. Invested||Total value||Avg. cost per unit|
|Aditya Birla Sun Life Frontline Equity||₹99,000||₹1,80,224||₹114.9||₹84,000||₹1,42,172||₹123.58||₹38,052|
|HDFC Mid-cap Opportunities||₹99,000||₹2,44,526||₹22.46||₹84,000||₹1,90,379||₹24.48||₹54,147|
|Kotak Select Focus||₹99,000||₹2,00,591||₹15.62||₹84,000||₹1,57,534||₹16.88||₹43,057|
|Returns as of March 7, 2018|
At best, you may have put this into fixed deposits. At worst, you may have spent it.
Now, consider the reasons for a SIP outside of cost averaging.
- One is to avoid timing the market and getting it wrong. In stopping and starting SIPs based on your perception of the market, you are effectively timing your investments. This is one of the reasons why we have always advocated SIPs.
- The second and most important, you are defeating the very purpose for which you began a SIP – disciplined investing that enables you to meet your financial needs. When you stop/pause SIPs, your investment is lower and thus your eventual wealth shrinks. Your SIPs are the basis on which you have planned your finances and goals. Therefore, you may find yourself short of funds when you actually need it. The longer the SIP is stalled, the higher is this risk. Even if you were to put this money into fixed deposits, their lower return compared to equity can still hurt your corpus creation.
- Finally, remember, equity is an asset class that demands both a long-term view and the ability to weather falling prices. We have been worried over market valuations in the past year. Any correction at this point is useful to bring stock prices back into realistic zones which bodes well for long-term movement.
So stay calm, and stay invested!