Don't Fear the Red: Stay Calm and Keep Your SIPs Going
SPK Finserve Private Limited
One of India’s Leading Mutual Fund Distributors and Income Tax Advocates
The sea of red on the portfolio screen is a stark reflection of the market's current turmoil. It's a feeling many of us know too well – the gut-wrenching sight of hard-earned money seemingly evaporating. As per data from AMFI, the SIP stoppage ratio soared to a shocking 109% in January, a clear indicator of widespread investor panic. The sheer number of discontinued SIP accounts dwarfing new registrations painted a vivid picture of fear gripping the market.
However, history and financial wisdom suggest that this knee-jerk reaction is often counterproductive. In fact, downturns present a golden opportunity to strengthen your investment portfolio by consistently continuing your SIPs. Market downturns are inevitable, temporary blips in the grand scheme of things. Contrary to instinctive reactions, continuing SIPs during such phases can be a wise decision. Here’s why:
Markets fluctuate, but history has shown that they eventually recover and continue their upward trajectory. Selling during a downturn locks in losses, while staying invested allows you to benefit from the recovery. This is because market fluctuations balance out over time. As a result, the duration of your investment reduces the impact of market volatility on your portfolio growth.
Sensex had seen 9 corrections with 20%+ Falls as shown in above events and saw stronger recoveries post corrections in next 3 years. Long term wealth is built in tough times.
2. SIPs Capitalize on Market Lows
Consistent SIP contributions throughout market cycles enable rupee-cost averaging, where you buy more units when prices are low and fewer when they are high. This lowers your average purchase cost. Example: Imagine you invest ?5,000 every month in a mutual fund through an SIP:
Total Investment: ?20,000 Total Units Purchased: 525 Average NAV of 4 Months: Rs. 41.25, Cost per Unit: ?38.10 (?20,000 ÷ 525). Even though the price fluctuated, you ended up with a lower average cost per unit i.e. Rs. 38.10 which is lower than the average of four months NAV i.e. Rs. 41.25. This approach ensures that market downturns work in your favor by allowing you to accumulate more units at a lower price.
3. Time in the Market Beats Timing the Market
Predicting market peaks and troughs is virtually impossible. Attempting to time the market can lead to missed opportunities for substantial returns. Historical data shows that missing even a few of the market's best days can drastically reduce your overall returns. Staying consistently invested, however, allows you to benefit from compounding and achieve significant long-term growth. Halting your SIPs disrupts this compounding effect, potentially hindering your financial needs.
Imagine three investors navigating the stock market over 45 years. Investor A, a master of timing, consistently buys at the market's yearly low-a feat nearly impossible in reality. Investor B, plagued by misfortune, always buys at the market's peak. Investor C, the epitome of disciplined investing, uses a Systematic Investment Plan (SIP), investing a fixed amount on the 10th of each month from April 1979 to February 2025.
The results, as of February 2025, are striking. Investor A, the market-timing virtuoso, achieved a 14.79% annualized return. Investor B, with his consistently ill-timed investments, still managed a respectable 13.94% annualized return. Remarkably, Investor C, the steady SIP investor, earns a 14.34% annualized return, nearly matching the market timer's performance.
This comparison highlights a crucial investment principle: consistent, long-term investing through SIPs can yield returns comparable to, and in some cases, nearly identical to, the results of perfect market timing. Ultimately, the data suggests that for the average investor, the effort spent attempting to time the market is often less effective than maintaining a disciplined, long-term investment strategy.
Conclusion
Rather than stopping SIPs during market downturns, investors should view them as opportunities. SIPs are designed for consistent, long-term investing. Maintaining your SIPs during market downturns allows you to stay focused on your financial objectives and build wealth effectively. While current market conditions may seem concerning, short-term volatility should not derail your long-term investment strategy. Remember, SIPs are a tool for steady wealth accumulation, not a quick fix for market fluctuations. So, the next time markets dip, remind yourself: downturns are an investor’s best friend if you stay the course.