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Dealing with SIPs in a volatile market

Having invested in mutual fund schemes for some time now, you have understood that Systematic Investment Plans (SIPs) are one of the best ways to accumulate wealth towards meeting your financial goals. By making small investments over the long term you can build wealth to meet your future financial commitments. With SIPs, you can make a continual and steady progress towards your financial goals without waiting to accumulate a large amount before investing.

But, it is natural for even the most disciplined investor to get anxious when markets become very volatile and accumulated wealth starts deviating from desired growth path. The most instinctive action in such conditions is to stop further investments and even withdraw accumulated wealth if volatility persists for longer. But, would that be a wise thing to do? Let’s sit back and analyse the situation...

Let’s go back and try answering the question as to what was your purpose of making systematic investment in the first place? Was it to time the market and make short term tactical decisions or was it to save and accumulate wealth over a period of time – a well thought through decision to build wealth for you and your family? It most surely was the later. If building wealth was your ultimate goal, there is every reason for you to be happy that your cost of purchase is lower and you are able to get more units for each of your SIP instalments. Here’s how...

Month

Amount Invested

Falling NAV

Units bought

Total Units bought

Average Cost

Month 1

5,000

10.0953

495.280

495.280

 

Month 2

5,000

9.9073

504.678

999.958

 

Month 3

5,000

9.6783

516.619

1516.577

9.8906

Month 4

5,000

8.8906

562.391

2078.968

 

Month 5

5,000

8.7620

570.646

2649.614

 

Month 6

5,000

9.1480

546.567

3196.181

9.3862

Total

30,000

 

3196.181

 

 


As can be seen, each Rs.5,000 invested is able to buy more number of units as the NAV is falling, except for the last month which bought less number of units than the previous month because of higher NAV than the previous month. Another way to look at this would be to see yourself benefitting from a lower average cost. If you had stopped your SIP midway, after the 3rd month, your average cost would have been Rs.9.8906 (Amount invested Rs.15,000 divided by Total units bought 1516.577) which is much higher than Rs.9.3862 (Rs.30,000 divided by 3196.181 units) if you continue till the 6th month.

Now, let’s analyse what happens if you withdraw all your investments mid-way? If you redeemed after the 6th instalment in the same illustration, your investments would get impacted in two ways. First, the value of your investment (Rs.9.1480 x 3196.181units = Rs.29,238.66) may be lower than the total investment you made (Rs.5,000 x 6 instalments = Rs.30,000) and second, the most recent investments may not be free from the exit load period, meaning that the amount available to you would be even reduced by the exit load charged. These charges usually cannot be reversed, once charged.

Having discussed that ‘stopping’ or ‘stopping and withdrawing’ a current SIP in a volatile market environment is not the most favourable action, we can summarise the advantages of continuing an SIP in the following paragraphs.

Let’s understand the advantages of continuing an SIP in a volatile market.

SIP, as the name suggests, is a systematic way of going about your investment activity. Quite often, lack of time and doubts about market movement are the factors that affect one’s investment activity. SIP is a tool that works to overcome these factors. By doing an SIP:

You are eliminating emotions from your investing activity. SIP makes the investments as planned without any further intervention from you. Thus you are spared of the decision-making agony every time you need to invest.

By deploying your surplus regularly, you are utilizing it effectively towards achievement of your financial goal. Every instalment takes you a step closer towards fulfilment of one or more of your financial commitments.

Fear of market fall is the biggest deterrent to equity investing. But in an SIP, you would be leveraging this possible fall to your advantage. As evident from the above illustration, you would in fact be buying more units with every fall in the market. In the above illustration, while the average of the NAVs is Rs.9.4136, the average cost of acquiring the units works out to Rs.9.3862 only. Clearly, the very market volatility that an investor fears has in fact worked to her advantage.

Market cycles and their impact

From 2004 to 2008, the Nifty moved from 2000 levels to 6000 levels. Investors would have seen their net asset value steadily increasing; every SIP would have given them fewer units. But in the middle of 2008, the financial crisis hit the markets. The Nifty crashed all the way back down to 2500 levels. Investors would have seen their NAVs erode sharply and the temptation would have been to exit their SIP commitments.

However, those who continued investing using SIP received more units due to fall in prices. Their average buying price would have been reduced sharply. After a couple of years, the markets returned to their upward surge. These investors saw the NAVs rise again, and this time, they were rewarded with attractive gains as a result of not only remaining invested, but continuing to invest in a falling market (in 2008).

Financial goals

Volatility in the market is common usually accompanied by steep falls such as the crash in the early 2000s due to the dotcom bubble and the South East Asian crisis or the banking industry led recession of 2008. Political fortunes in the country also play a role in market volatility. Other factors such as oil prices and U.S. interest rate policies also contribute to market volatility.

The worst thing an investor can do is to enter the market at peak levels and exit at low levels out of panic. Remaining invested over the long term through peaks and troughs and moreover, using the SIP investment strategy to continue investing, is a smart way to build wealth.

Note: The given examples are for illustration purpose only & shall not be construed as indicative yields/returns of any of the Schemes of Canara Robeco Mutual Fund. Past performance may or may not be sustained in the future.

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Mutual fund investments are subject to market risks, read all scheme related documents carefully.