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Don’t let market turbulence scare you. SIPs work well only because equity investing is a roller-coaster ride

‘Buy low, sell high’ — lesson 101 for success in investing is really a no-brainer. But for us emotion-driven humans, this cardinal principle is easier said than practised. When the market turns choppy, as it currently has, many of us panic and stop our systematic investment plans (SIPs) in mutual funds.

Don’t make this mistake. SIPs work great in the long run precisely because the equity investing is a roller-coaster ride.

In a SIP, you invest a fixed sum at regular intervals to buy units of mutual funds. The number of units you get depends on the prevailing net asset value (NAV) of the fund at the time of investment; the higher the NAV, lesser the number of units you get. And lower the NAV, higher the number of units in your kitty.

So, when the market and the NAV fall, you accumulate more units of the fund. This results in what is called ‘cost averaging’ — your average cost of acquiring the mutual fund units comes down.

In the long run, despite the volatility during interim periods, equity as an asset class and well-run equity mutual funds should see their values trend higher. Your return will be maximised when the average cost of investment is minimised.

This happens when you buy cheap, making a falling market the best time to invest in SIPs.

SIP during dip

A real life example will drive home the benefit of continuing with SIPs when the market dips. Say, in the go-go days of January 2008, you started investing ₹1,000 each month in ICICI Pru Value Discovery, one of the top-rated equity funds.

Even when the bears ran amok in late 2008 and early 2009 as the global financial crisis hit, you gritted your teeth, continued the SIP, and kept investing through market ups and downs till January 2015. Your perseverance and patience would have paid off handsomely.

The ₹85,000 invested over the years would be worth more than ₹2.42 lakh today giving you an annualised return of 26.72 per cent.

But what if you, unnerved by sharp market falls, stopped your SIP between October 2008 ánd March 2009, then between August and December 2011, and also between June and September 2013? Your total investment of ₹70,000 in this case would be worth about ₹1.81 lakh today — translating into an annualised return of 24.57 per cent.

That’s a significant 2.15 percentage points lower than if you had stuck with the SIP even during the market downturns. That is, if you had timed the exit and re-entry so precisely, which is never easy. Also, consider the case if you invested the entire ₹85,000 in January 2008 in ICICI Pru Value Discovery and held on so far. Your investment would be worth about ₹2.46 lakh today, higher than the current value under the SIP.

But your annualised return at 15.35 per cent would be far lower than if you had taken the SIP route. Of course, if you had invested lumpsum when the market scraped the bottom in March 2009, it would have translated into higher annualised returns than going the SIP way. But then again, it is very tough to time the market; many an investor has lost his shirt trying to do so.

Ergo, it makes sense to invest in equity mutual funds through the disciplined SIP way and continue with them even when the market mood sours. This will help you build significant wealth in the long run for your various goals in life.

Regular reviews

Even SIPs need regular reality checks. Do this by reviewing the performance of your fund at least once a year. A SIP works well only when you invest in a good fund — one that has a credible track record of beating its benchmark and consistently sits at the high table with best-performing peers.

If your fund is underperforming consistently, it’s best to cut your losses and shift to greener pastures.

When you are with a good fund though, don’t lose sleep over market turbulence which drags down your fund too. Instead, take a deep breath and remember that sage advice from the Oracle of Omaha, “Be fearful when others are greedy, and greedy when others are fearful.”