Even as record new SIPs are being created, discontinuation of SIPs has also surged. Some 8.6 lakh SIPs were discontinued in July—the highest in the current financial year, shows data from AMFI. Some want to take a step back and wait for the markets to correct before restarting their SIPs. This sounds like a logical step to take. But is it really practical? Will it lead to a better outcome over time? If waiting for a correction, are you sure you will restart your SIPs at the right time? Investors must consider several aspects before tinkering with their SIPs. In this week’s cover story, we attempt to help you resolve the dilemma.
Are your SIPs vulnerable?
Financial advisers often argue that there is no right time to start an SIP. But ending the SIP is another matter altogether. For perspective, let us look back at the 2008 market crash. Suppose Priya had initiated an SIP of Rs 10,000 in the SBI Nifty Index Fund for the first of every month since January 2005 and continued with it for the next three years. At the end of December 2007—near the market peak—her SIP would have fetched a superlative return of 48.12%. The Rs 3.6 lakh invested would have grown to Rs 6.97 lakh. Little did she know what was about to happen. Starting from January 2008, the market went into a tailspin. Let us say Priya continued with her SIPs through this phase. Her SIP returns started shriveling quickly. By 30 September 2008, the return had whittled down to 6%. The next month, her return was in the red, yielding –9.57%. The Rs 4.6 lakh invested till then was worth only Rs 3.8 lakh.
A similar story would have played out for Priya if she initiated an SIP of Rs 10,000 back in January 2017. When the market peaked in January 2020, the SIP was yielding a decent 10.38% return. Rs 3.7 lakh invested was worth Rs 4.33 lakh. By the market lows of March 2020, this SIP was running into loss to the tune of –18.74%. Rs 3.9 lakh invested was then worth only Rs 2.83 lakh. If this marked the end of her SIPs, it would have left a sour taste.
But this is only one part of the story. Suppose Priya had let her SIP run through the market trough and subsequent market uptick on both occasions. By 31 July 2009 her SIP had yielded 12.8% with her Rs 5.5 lakh outlay worth Rs 7.38 lakh. Similarly, if she had let the 2017 SIP run till December end last year, her return would have swung from– 18.74% to 14.32%. The Rs 4.8 lakh invested would be worth a neat Rs 6.38 lakh.
What does this show? The ending phase for an SIP is crucial to the whole return experience. Even with steady drip of money averaging your purchase cost over time, your entire experience hinges around how the market is placed towards the end of your SIP journey. This is a feature of calculating SIP return—it considers investment over a period of time but withdrawal happens on one day. This can swing final returns sharply on either side, depending on the prevailing fund NAV. “For any market-linked investment, point of exit is more important than entry. An SIP is no different,” says Kirtan Shah, CEO, SRE Wealth.
Even longer-term SIPs are not immune from such oscillations. A long running SIP will also be at the mercy of market conditions at the fag end. An unexpected turn of events at the end of your SIP journey could upset your calculations. Imagine you had started a monthly SIP of Rs 10,000 in January 2011 and continued it into last year. By 20 January 2020, the Rs 10.9 lakh invested would have grown to Rs 18 lakh with a return of 10.8%. But within two months, the same SIP was fetching a paltry 0.5% with the investment of Rs 11.1 lakh over 13 years growing to Rs 11.36 lakh. “No SIP is a fool-proof mechanism for generating positive return. It will be subject to the same volatility experienced in the market,” argues Santosh Joseph, Founder and Managing Partner, Germinate Investor Services. The initial few years of the SIP can be particularly unnerving as intermittent market falls lead to a sharp dip in SIP returns. More often than not, however, as your SIP time frame increases, the impact of market declines on final SIP return reduces.
Should you worry about SIPs?
The answer rests entirely on the time horizon of your SIP. If you are investing for a specific goal with a defined timeline, this decision should come easy. If the target date is near on the horizon, it may be prudent to take your foot off the pedal now. Exposing it to the market’s vagaries for the remaining tenure may end badly. “If you want to ensure your SIP experience doesn’t sour, start pulling out the money well before the goal hits,” says Hemant Rustagi, CEO, Wiseinvest Advisors. If the target date is 12-18 months away, you can terminate the SIP and shift the corpus into a debt fund. If the market falls this close to your goal, you won’t have time to regain lost value from a subsequent rebound. While a rebound can play out quickly— as seen last year— it leaves much to chance.
But if you still have about five years to go, it is best to let the SIP run, insist financial advisers. The market position should then be irrelevant. “Market timing in an SIP should be only be done when the goal is near. Until then, it is best to ride the market through its ups and downs,” argues Shah.
Stop now and restart later?
It is said that the seeds of a healthy SIP are sown in a weak market. That is when the beneficial averaging—buying more units at lower prices—actually happens. So what is the utility in pursuing the SIP on the upside? Why not wait for the phase of beneficial averaging to get the most of your SIP? By stopping the SIP at high prices and restarting at lower levels, you could potentially squeeze higher return, right? But you can never know for sure what the market will do next. The market may continue its uptrend for more time or it may fall now.
Besides, if you pull out now and the market does correct, at what point will you restart the SIP? Will you have the resolve to restart when the market is in the red? Many investors wait on the sidelines of a market crash, waiting for stock prices to fall even lower. But when that window opens, most get cold feet. Ankur Maheshwari, CEO, Wealth Management, Equirus Capital, remarks, “Courage and opportunity often do not come at the same time. Investors usually lack courage when there is opportunity in the market.”
Ending phase matters more than time of entry into SIP
Starting SIP at market top or bottom does not change outcome as much as timing of exit.
This is critical because if the market corrects, that will be the best time for SIPs. It’s a tool that thrives on volatility. “The rupee averaging concept behind an SIP works like a charm during a market downturn,” observes Joseph.
Let us consider another example to see this in action. Akash starts an SIP along with Priya in January 2005. But in December 2007, he feels the market is too expensive and suspends further SIPs. Luckily, he gets his timing right and the market falls. Even as Priya continues to invest, Akash remains on the sidelines. Akash restarts his SIP only once the market rebounds in April 2009. By the time the market regains its peak, his SIP is valued at Rs 9.45 lakh. At the same time, Priya’s SIP has now grown to Rs 11.82 lakh. Even assuming Akash put aside the Rs 10,000 in a liquid fund in the interim instead, his corpus is smaller by Rs 68,000.
What put Priya in the lead? When the market bottomed and during the subsequent rebound, her SIP was fetching units at lower prices. “The same math which brings down the SIP returns in a decline works in our favour when the market recovers,” says Arun Kumar, Head – Research, FundsIndia. “Adding to the power of math, this time we also have more mutual fund units (accumulated during the market correction) participating in the upside leading to a significant improvement in returns.” Akash missed out on this phase of dirt-cheap prices. By the time he restarted the SIP, the market had already started its climb.
Experts insist there is no point in second-guessing the market with a stop-andrestart approach to SIP. Terminating SIP during euphoric market conditions may at times fetch better yield on the SIP. But this will likely come at the cost of a big shortfall in corpus. The potential higher return on the SIP is purely a cosmetic gain. In reality, you end up putting less money at work.
Every rupee counts
Over the entire journey of an SIP, it will fetch you some units at very cheap prices, some units at very high prices and many at moderate prices. The bulk of the heavy-lifting by the SIP will be at market lows, but units bought at or near intermittent peaks also count towards the final SIP corpus.
A rising market also provides enough windows for an SIP to buy during intermittent dips. If you space out your monthly SIP outflow across several days every month, it will help capture opportunities even in a rising market. “Volatility plays out at both ends. The vertical lift-off experienced by the market over the past 18 months is also another form of volatility,” contends Joseph. “Investors must learn to hold their nerve not just during downside volatility but also on the upside.”
Long-term SIPs tend to see lesser impact from market declines
Impact of temporary market falls is much more stark on the same SIP returns in shorter time frames.
Figures are based on long-term SIP return of 12% Source: FundsIndia Research
Besides, the market hitting new all time highs should not be taken as a cue that markets will fall. FundsIndia identified all the periods where the Nifty 50 TRI index had hit an “all-time high” in the past 20 years. It also checked the 1-year, 3-year and 5-year returns subsequently. If you had invested at these levels, the Nifty 50 TRI gave positive returns 73% of the time on a 1-year basis and 87% of the time on a 3-year basis. On a 5-year basis, the index yielded positive return 100% of the time. They further found that the average 1-year returns when invested in Nifty 50 TRI during an all-time-high is around 13%. And six out of 10 times, the 1-year returns exceeded 12%.
This clearly shows that “all-time highs” don’t necessarily imply a market fall—it can continue to rise. Investors must learn to ignore the noise around every fresh market peak. “The equity market will invariably go higher in the long run. When you look back at this time years later, you will realise this was just another milestone in its journey. But you will have made money only when inside the market and not outside,” asserts Rustagi.
All-time highs don’t always mean markets will correct
After all ‘all time highs’ in past 20 years, Nifty TRI gave positive returns 73% of times on 1-year basis, 87% times on 3-year basis and 100% of times on 5-year basis.
Return as on 31 July 2021 | Source: FundsIndia Research
The real utility of SIP lies in its automated savings habit. Kumar points out, “The beauty of the SIP approach is that you don’t have to worry about market highs and lows. It just automates the whole investing process.” Maheshwari concurs, “There is no better way to invest in equities. It keeps investors from getting swayed by market sentiment or emotional bias.”
Be patient with new SIPs
If you are looking to start a fresh SIP in an equity fund at this point, be prepared to extend the investing time horizon a bit longer than usual. And keep return expectations low in the initial years. Historical data of SIP performance provides enough evidence to suggest returns can remain benign immediately post a market peak but shoot up dramatically in a few years. A 3-year SIP in HDFC Top 100 ending in February 2000 had yielded a smart 51% return. If you started another SIP in the same fund in March 2000 and invested until March 2003, the `3.7 lakh investment would have only grown to `4 lakh at 5%. But if the investor had stretched the SIP till March-end 2004, the SIP would have fetched 44% return amounting to `11.46 lakh. Kumar asserts, “If you are an SIP investor, you should pray that next 2-3 years are bad, allowing you accumulate more units at low prices. If you extend the SIP beyond this phase, you can expect to make smart gains.” The ideal time horizon for an equity SIP is 7-8 years, insists Shah. “The economy typically goes through an entire market cycle in this time frame to see the SIP iron out volatility.
