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Should you pause MF SIP when the share market is on high point
21/12/2019

Most investors in the stock markets normally adopt the mutual funds route for long term financial planning. A normal strategy is to do via systematic investment plans (SIPs), which provide the added advantage of rupee cost averaging. SIP is a passive approach to long term wealth creation and avoids timing the market. That brings us to a pertinent question; should you exit equity fund SIPs at market peaks and re-enter at lower levels? The answer is an emphatic “No”. Persisting with a SIP for a longer period adds value. Here is why!

  1. SIPs can neutralize market volatility over time

    The SIP invests regularly in a fund on a particular date. The idea is when the prices go up; the investor gets more value via NAV. When the markets are lower, the investor gets more units. This gives the SIP investor a unique advantage over a lump-sum investor. SIPs make time work in your favour and discontinuing the SIP goes against this essential principle.

  2. SIPs are pegged to long term goals; which cannot be compromised

    How do SIPs fit into your investment portfolio? The process begins with laying out your long term goals. Once the goals are laid out, you work the monetary requirements at the end of the goal period. Based on the expected corpus, SIPs are designed to reach the goals. If you discontinue SIPs, you compromise on long term goals like retirement, child education etc.

  3. Stopping SIPs in between means you lose the compounding edge

    Power of compounding works best when you stay invested and intermittent cash flows are reinvested in the SIP. That is only possible if you seriously commit yourself to the SIP for the long term. If you terminate the SIP in between, the compounding advantage is lost out and the SIP will not be able to deliver desired target returns.

  4. When you stop SIPs, you lose the regular investing discipline

    SIP underscores that discipline creates wealth. SIPs impel you to do two things. Firstly, SIPs force you to look at savings as a target rather than residual item and budget accordingly. Also, inflows are periodic so SIPs help to synchronize outflows with inflows. By terminating your SIP in between, you lose out on the discipline advantage.

Proof of the pudding lies in the eating

Let us look at SIP performance under two scenarios; a bull market scenario and a passive long term scenario.

Scenario 1: Perfectly timed bull market scenario

SIP Start

Amount

SIP Evaluation

Amount

SIP start month

Jan-03

Total Contribution

Rs.3,00,000

SIP end month

Dec-07

SIP End Value

Rs.28,96,470

Monthly SIP

Rs.5,000

SIP IRR (%)

17.07% per year

Invested in

HDFC Top-100 (G)

 

 

Data Source: Value Research

What would have happened if you had started the SIP at the bottom of the rally in 2003 and exited at the top? Of course, we are assuming that you timed the market to perfection. Returns at 17.07% annualized are fantastic. But had you invested lump sum in 2003, your returns would have been phenomenal; so this SIP could disappoint you.

Scenario 2: Started a SIP in 2003 and continued till date (forget timing)

SIP Start

Amount

SIP Evaluation

Amount

SIP start month

Jan-03

Total Contribution

Rs.9,95,000

SIP end month

Jul-19

SIP End Value

Rs.42,90,534

Monthly SIP

Rs.5,000

SIP IRR (%)

15.69% per year

Invested in

HDFC Top-100 (G)

 

 

Data Source: Value Research

The true blue long-term investor has held on to the SIP over the last 16 years and has earned 15.69% without bothering to time the market. That is actually flattering compared with the first scenario where the returns are not substantially better despite catching the top and the bottom precisely. These returns are despite being through 16 tumultuous years. That is the perfect passive narrative.

Why you must just persist with SIPs?

Here is why you must persist with SIPs over a longer period of time.

  • Over a longer period of time of over 10 years, equity SIPs do work well even if you don’t bother too much about timing your entry and exit.
  • SIPs can be quite misleading in the short run and terminating SIPs in between can distort returns and your long term goals.
  • SIPs are cut out for volatile markets compared to when markets are flat or directional since volatility ensures lower cost of acquisition. Hence, just persist!
  • Over a longer period of time, the relative advantage of timing is limited as we can see from comparison of Scenario 2 versus Scenario 1.

Irrespective of a market high or a market low, don’t try to second guess your SIP. Just maintenance the discipline; that is what counts in the long run.

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