Why Stopping in Tough Markets Could Cost You Big

Why is stopping SIPs a bad idea when the markets see a correction? How do investors miss out?

With the political situation in India turning fluid, investors are concerned that the stock markets may be close to the top. In that case, is it the right time to exit your equity fund SIPs and shift to other assets? Not exactly! One of the biggest lessons from COVID pandemic was that the investors who persisted with their SIPs through that tough period, ended up laughing all the way to the bank. But, what did that happen? There are several reasons for the same.

For starters, equity fund SIP returns are based on the principle of rupee cost averaging. That means, when the market goes up, you get more value and when it goes down, you get more units. That can only happen if SIP allocations happen as a discipline. If you compare a lumpsum and SIP investment in a bull market, the lumpsum would have surely worked better. It is in these types of volatile markets that SIPs deliver the best returns. It is not possible to time the markets on a consistent basis, nor is it essential. Investing regularly in an equity fund for a long time in a disciplined manner is the answer.

The proof of the pudding lies in the eating. Let us look at 3 cases where the investor starts the SIP at the market peak.

·       If an investor had started SIP on the Nifty index fund at the peak of the technology boom in March 2000; CAGR returns till date would have been an imposing 13.2%.

·       Had you started the SIP on the Nifty index fund at the peak of the global financial crisis in January 2008, your CAGR returns would have been 12.1% till date, and the money would have multiplied 2.6 times.

·       Best of all is had you started the SIP in January 2020, just ahead of the COVID crash, your corpus would have grown 1.3 times and you would have earned a whopping 19.8% CAGR returns till date.

The moral of the story is to persist with your SIP through thick and thin. That is the royal route to long term wealth creation, as Euclid would have put it!

How do investors design their mutual funds portfolio to minimize losses during a bear market

In India bear markets are nothing new. We have seen sharp bear sell-offs in 2000, 2008, 2011, 2013, 2018 and again in 2020. Most of these have been significant corrections of 20% to 60%. The first way to minimize losses during such bear markets is to persist with your equity SIPs. If you compare current Sensex levels with previous major peaks of last 25 years, it is much above any of these levels today. The bear sell-off gives you an opportunity to accumulate these equity funds at much lower NAVs so as to reduce your average cost.

The second method is to follow the traditional asset allocation approach. Here is how it works. Start with your medium term and long term goals and put a corpus value to each of these future goals. Create SIPs on debt funds for short to medium term goals and SIPs on equity funds for medium to long-term goals. Ensure that the asset allocation matches your risk appetite. That becomes your base mix. Each time, your mix goes out of sync by a certain percentage, you revert back to the original mix. That ensures that you take profits automatically at higher levels and have liquidity for opportunities at lower levels.

Lastly, investors can seriously look at tactical allocation funds as a means of overcoming this challenge. Tactical allocation funds like Balanced Advantage Funds, Equity Savings Funds and multi-asset allocation funds spread across equity, debt, derivatives, and other assets. This not only diversifies the portfolio, but the fund manager also tactically shifts between equity, debt and other assets based on well-set valuation based rules.

Quite often, bear markets look intimidating. But they are the pillars on which profitable portfolios are built.