What to do about your SIP in falling markets?

The recent fall in the equity market has led many investor's portfolios to the negative. Where the market recently touched its all-time high last month, the market has completely turned around since last month. This raises the question should you stop your SIPs and redeem your equity exposure completely? In this article, we will be focusing on SIPs mainly as more convenient and preferred behavior in a bearish market is to discontinue the SIPs.

Before moving forward lets quickly recall what a SIP is :

A systematic investment plan (SIP) is a disciplined way of investing in mutual fund schemes, in which an investor can make equal payments at regular intervals (normally monthly) over an extended period to accumulate wealth over the long run. It inculcates the habit/discipline of saving and building wealth for the future.

SIPs make sense only if invested regularly for a long period of time. If you get into a SIP only for a short period, the returns generated are insignificant or volatile. As the investing period goes on increasing, the gap between the amount invested and the market value of the investment goes on widening substantially. Time works like a lever in the market: large amounts of return can be earned by investing comparatively smaller amounts of money, if invested consistently for a long period of time.

So what are the factors that make SIPs Suitable for the bearish market? There two main yet very obvious factors that come into play here:

1. Rupee Cost Averaging:

This is an approach or a benefit wherein the investor can buy more units when prices are low and less when prices are high. Ideally speaking, most investors want to buy stocks when the prices are low and sell them when prices are high. But timing the market is time-consuming and risky. Rupee cost averaging can help reduce the average cost per share over time (provided the investor does not stop SIPs in bear markets) and increase your profit when the cycle turns and markets start rising.

2. Power of Compounding:

Compounding means that the money you make off an investment can be reinvested to make even more money than your initial investment. The money you make goes back to work to make you even more money than before.

Let's say you've invested Rs 10, 000 and it makes 10 percent interest a year. In the first year, you make Rs 1,000 in interest. But in the second year, you'll make Rs 1,100 (not only does your initial investment of Rs 10,000 earn interest but so does the additional Rs 1,000 you made in the first year). In the tenth year, you'll make Rs 2,358. And in the 30th year, you'll make Rs 15,864. All of that comes without making another investment beyond your initial Rs 10,000. Hence the longer you stay invested, higher will be the benefit of compounding.

In conclusion, investors shouldn’t worry about stopping SIPs when the market is declining. In fact, that is the period when an investor can accumulate more units at a cheaper cost and then benefit from the eventual up move in the markets. SIPs are done by investors to meet long-term goals and should be done for at least 5-10 years. They should not be worried about near-term volatilities or small negative returns in the near-term. Corrections are the best time to accumulate maximum numbers of units for the future. In fact, investors can use this opportunity to increase SIP amount by using a top-up facility provided by the fund house or may go for the new variants of SIP. 

Warren Buffett once said that as an investor, it is wise to be “Fearful when others are greedy and greedy when others are fearful.”

We at finpal had been focusing on the fact that there is no right time to start investing or to get going with your investment. As we always say the best strategy to plan your investments is to keep investing for the long term and see past any short term scenario.