Markets are down-The Sensex was almost at 30,000 in March 2015 and now it is around 27,000 levels. Many experts are predicting, it can still go down. Most of the investors have the above question in their mind. Should I stop/postpone my SIPs in Mutual Funds?
How SIPs work- When Markets are down or up
In Systematic Investment Plan, you invest the same amount every month irrespective of the level of the market. Let us assume that, you are investing Rs. 5,000 on the 1st of every month in HDFC Equity Fund by way of SIPs. Let us assume that the NAV of the Fund was as follows from January 2015 to May 2015:
1st January – 510
1st February – 520
1st March – 530
1st April – 480
1st May – 450
In this case, you are investing Rs. 5,000 every month, irrespective of the NAV movements. In January, you will get 9.803 units (5000/510=9.803); and in February you will get 9.615 units and so on… In the month of May, you will get 11.111 units. How?
When the markets are down, the NAV of the Fund is also down and you will get more units like in May. But, when the markets are up, the NAV of the Fund is also high and you will get fewer units like in February. So, your purchase price 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.
Story of SIPs during the 2007-2010 volatile market
I will explain it to you with an example. During a volatile period in the recent past, the Sensex was around 20,000 levels in December 2007 and it was an all-time high at that time. The markets started correcting in 2008 due to the global crisis and it had corrected by around 50% in one of the steepest fall in Indian history. But it started recovering slowly and it reached the same 20,000 levels in December 2010. So, in absolute terms, there was no growth in Sensex value for the 3-year period from December 2007 to December 2010. Had you invested Rs. 10,000 in Sensex in December 2007, it would have reduced to Rs. 5,000 and would have returned to the original Rs. 10,000 levels by December 2010.
Let us see how SIPs have performed during the same 3-year period. Assume that, you were investing by way of a Rs. 1,000 SIP in HDFC Equity Fund for the 3-year period i.e. December 2007 to November 2010. The NAV of this Fund as on 1st December, 2007 was 207.9210. The NAV was moving in line with the volatile markets during this period. By March 2009, the NAV was reduced to 96.2250. Many investors stopped their SIPs seeing the reduction in NAVs. But the brave hearts continued the SIP. The NAV started appreciating with the market recovery and it reached 306.9680 in November 2010. The value of Rs. 36,000 invested during these 36 months was Rs. 64,002 as on 1st November, 2010. The return percentage is alarming and tempting! The NAV of this Fund is 463.672 as on 28th April, 2015 and this investment of Rs. 36,000 is worth Rs. 96,675 now. This is the benefit of SIP.
Volatile markets are good for SIPs – Don’t stop SIPs
So, when the markets are down, be happy and continue your SIP. Don’t stop SIPs in the volatile markets. Volatility can help you in the long term.
But, if you are 2-3 years away from your financial goals, then stop the SIPs in Equity Funds and start it in a Debt Fund to protect your money from any last minute volatility. You can use a Systematic Transfer Option to transfer your Equity Savings to Debt when you are nearing the financial goals.
It is better to have the entire amount in Debt Funds 1-2 years before the goal. This can help you in protecting your savings.
What is your view on SIPs- Should you stop it or continue the same when markets are down?