• Stick to SIPs in a falling market to maximise gains
  • Stick to SIPs in a falling market to maximise gains
    Icra Online Research / Wednesday, December 28, 2011 8:00 IST
    Fear has made investors cautious; greed now looks out of sight as India's equity market is down for more than a year. In addition, the volatile market has made investors puzzled about the future direction.There is no doubt that long-term mutual fund investments are still giving better returns whereas investors who entered at higher levels are feeling uneasy looking at the market volatility.
    Here, if an investor is thinking to stop their systematic investment plan commonly known as SIP, he must reconsider his decision. He could be losing on two fronts: First, if market goes up, he loses the opportunity to convert his negative returns into positive. Second, if market drops further, he loses the opportunity of higher units. In a falling market scenario, most investors lose their patience or become anxious about their eroding portfolio value.
    Also, some negative news in the Indian or global market forces certain proportion of investors to cancel their SIPs. This type of behaviour is a potential source of damage and goes against the systematic way of investment to create wealth. To make the financial planning more difficult, most investors restart SIP when market moves up. In this case, the investor loses the best investing period and finds it difficult to accumulate needed corpus to achieve his financial goals. Investing in bad times could be a boon when market goes up.
    Trend analysis
    To give a better understanding of SIP, we at Icra Online took different time periods (scenario) of Sensex over the last two decades to show that systematic investment in bad period actually benefits the investor. We have also compared with lumpsum investment to highlight who is better-off in a particular scenario.
    The study shows that the best period to reap maximum benefit through SIP is a downside market or range-bound market. In a V-shaped recovery (from February-2000 to January-2004 and January-2008 to November-2011) where market initially falls and then recovers, SIP investment helps gain from this movement. In a range-bound market (from June-1994 to September-1999) also, it gives a better result as it benefits from both the up-and-down cycle trend. Hence, it would not be prudent if the SIP is stopped in a falling market. We can also understand that both these scenarios are the most difficult ones to follow and require patience to earn higher returns in the equity market.
    This is where disciplined investment comes similar to what investors do in the case of life insurance and other fixed or risk-free debt investments. However, in the case of bull market (February-2003 to January-2008) or when bull run is followed by a correction (January-1991 to March-1993 and February-2003 to October-2008) SIP scores lower than lumpsum investment. But practically timing the market is difficult for many investors. The investor should also note here that as SIP is done on a continuous basis, the real returns calculated will be higher than absolute returns shown in the table. So, in some cases, like from September-2009 to November-2011, lump sum returns are better than SIP, but actually it could be the opposite.
    Now as the longest bull-run (5 years) is the story of the past, it is likely that the investor may see a range-bound market for some time or slow/crawling upward market.
    SIP method is better off in this scenario as it gives the advantage of cost-averaging. In the difficult economic scenario, we could see some bad quarters, but then interest rates will start going down, and markets will revive as the Indian growth story is still intact.

    From the financial planning perspective also, it is better to think about financial goals rather than short-term unrealised losses. In an investment cycle, investors will see both bright and gloomy days. So, it is important to continue your investment to get maximum benefit in the longer run.