by Mayank Bhatnagar
There is a sense of caution that prevails among investors when stock markets fall.
The recent correction in the global economy owing to dismal performance of the Chinese economy has brought back memories of the equity market correction of 2008-09. At that time, the correction was largely due to the financial crisis in the US economy. Several major institutions either failed or were acquired under duress largely under bailout plans by the government. These included Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie Mac, AIG, and Citigroup etc. Even then, the Indian equity markets corrected and came down to very low levels. The Sensex was at 20,000 levels in December 2007, which was an all-time high. And then the financial crisis shook the global markets including India. The stock market started correcting in 2008 and it had fallen by around 50%. Since the Indian economy was growing at a rapid pace, the equity market started recovering and it reached the same 20,000 levels in December 2010. In absolute terms, there was no growth in Sensex for the 3 year period from December 2007 to December 2010. Had you invested Rs. 10,000 in Sensex stocks in December 2007, it would have reduced to almost Rs. 5,000 and would have regained to the original Rs. 10,000 levels by December 2010. Hence, there would have been no gains over 3 years.
The SIP Advantage in a falling market
Now, let us see the SIP performance during the same 3 year period between 2007 & 2010. Assuming that you were investing Rs. 10,000 by SIP in UTI Opportunities Fund (Fund name has been taken randomly to illustrate an example of the scenario then) for the 3 year period December 2007 to November 2010. The NAV of this fund as on 15th December 2007 was 22.56. The fund value was showing a downward trend in line with the market volatility in those times. By March 2009, the NAV was reduced to 11.84. Many investors stopped their SIPs seeing the reduction in NAVs. But the brave hearts continued with their SIPs and bore fruitful results. The NAV started appreciating with the market recovery and it reached 29.03 in November 2010. The value of Rs. 360,000 invested during these 36 months was Rs. 568,882 as on 15th November 2010. The annualized return being at an impressive 33.94%. This scenario has not been present only for the mentioned period but for all periods where the markets have fallen in the past. During the dotcom crisis in 2000-01, the stock markets were not performing and had entered into a negative phase. An SIP of Rs. 10,000 in Franklin India Blue Chip Fund that would have started on 1st January 2000 for 4 years would have given an impressive annualized return of 34%. The invested amount of Rs. 480,000/- (through 48 SIP installments) would have grown to a sizeable corpus of Rs. 906,536/- by 1st December 2003.
Should I stop my SIP when the markets fall?
In a volatile market, it is always advisable to invest by way of SIP, because, it will average out your cost of investments. You will get more units when the markets are down and fewer units when the markets are up. In a systematic investment plan, your discipline to invest a fixed amount every month irrespective of the level of the market plays to a great advantage. Let us assume that you are investing Rs. 5,000 on 10th of every month in Franklin Templeton by way of SIPs. Let us assume that the NAV of the fund was as follows from January 2015 to May 2015.
In this case, you are investing Rs. 5,000 every month, irrespective of the NAV.
In January you will get 14.8 units (5000/338.82=14.8 unites) and in February you will get 14 units and so on.When the markets are down, the NAV of the fund is also down and you will get more units like in January. But when the markets are up, the NAV of the fund is also high and you will get fewer units like in March. So, your purchase prices will average out and this will bring down the cost of units in the long term. When the markets are up, you will get the benefit by way of capital appreciation. This is the essence of SIP investing.Hence, the above illustration shows how continuing and not stopping SIPs during volatile market conditions help create wealth for investors who stick to their long-term objective of achieving their financial goals. The ups and downs of the equity markets help investors accumulate more units in a market that crashes or corrects. Eventually when the markets see a bull run, these investors would have already been on the path of their goal achievement. Thus, it is important to maintain discipline in SIP investing, as stopping your SIP should primarily depend on your goal achievement rather than unpredictable market movements.
Written by Mayank Bhatnagar (Chief Operating Officer at FinEdge Advisory Private Limited)
FinEdge Knowledge Report
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