Market Crash – Will You Stop Your SIPs ?

I am getting many calls asking whether they can stop their SIPs because of the recent 10% crash in the market. I thought of answering this by giving the live example of a major crash in 2008 and the subsequent recovery in the market. Before going into the actual case study, let us understand what a SIP is?

What is Systematic Investment Plan (SIP)?

All of us know what a Recurring Deposit (RD) with a bank is. It is nothing but investing a fixed amount every month in a bank for a particular period.  SIP is exactly the same in mutual funds. Systematic Investment Plan (SIP) is investing a fixed amount regularly, without looking at the level of the stock market. If the market is high, you will get lesser units and if the market is low, you will get more units. This will average out your cost per unit and will benefit in the long term, when the market rise. This is called Rupee Cost Averaging and has proved very useful to investors. Now we have monthly, fortnightly and even daily SIP to suit customer’s needs. You can start SIP with even Rs.500/- per month.

Advantages of SIP

1. It encourages disciplined savings & you get the power of compounding.

First of all, SIP is a tool where, you are putting your regular savings into regular investment. It makes sure that you don’t over-spend if the money would lie idle in your account. It also works on the principle of Power of Compounding as the moment you save, you are investing immediately and hence you give maximum time to your investment. World over it is accepted as the most efficient method for wealth creation.

Let us take the example of 2 friends A and B who started their career at age 25. A started an SIP of Rs.5000/- immediately while B decided to start savings from the age of 35. He decided to save monthly Rs. 10,000/-. Who will have more money at the age of 55?

Total investment of A in these 30 years is 18 Lakhs, while B invested 24 Lakhs in 20 years. But at an assumed annual return of 12%, A will have 1.74 Crores and B will have only 99 Lakhs in his account at age 55. This is the power of compounding. If you start early savings, you can reach your goals with less monthly commitment.

2. It is easy to start, flexible and liquid.

SIP is easy to start. You have to just give cheque for one month and from next month, you can opt for direct debit from your bank account. You have the flexibility to withdraw for any emergency or even stop.

Now, you can start SIP online, if your KYC is already updated.  The entire process is online and is very user friendly.

You can also read the article – How to start online SIP in direct Plan of mutual funds.

Performance of SIPs in the last decade

We give below some of the popular Large Cap funds/Midcap Funds.  The period covered here is from November 2008 to October 2018, which includes major and minor crashes and the recovery in the stock market. Returns are CAGR as on 4^th October 2018.

Aditya Birla Sunlife Frontline Equity – 13.64%

SIP -1000 per month, Total Invested Amount – 1, 20,000, Current Value – 2, 42,000

ICICI Prudential Blue Chip Equity – 14.53%

SIP -1000, Total Invested Amount – 1, 20,000, Current Value – 2, 54,000

Franklin India Prima Fund- 18%

SIP -1000, Total invested amount – 1, 20,000, Current Value – 3, 10,000

L&T Midcap fund – 19%

SIP -1000, Total invested amount – 1, 20,000, current Value – 3, 25,000

I have considered regular plan here as direct plan were introduced only in 2013.

Data Source: Value Research Online

 How, you benefit in a volatile stock market?

In a volatile market like this, it is advisable to invest by way of SIP because it will average out your cost. You will get more units when the markets are down and fewer units when the markets are up.

Sensex was at 20286 at the end of December. 2007 and had a major crash in the following period. By June 2008, it was down at 13462 and reached the low of 9647 by Dec. 2008. Then it started the upward journey with many ups and downs in between and finally reached close to 39000 in August 2018. Now it is again down to 35000 in October 2018 and people are thinking whether to continue their SIP or stop it.

It is clear from the above chart that the SIP investors in the suggested 4 funds made an average return of 16% during this period on their investment.  This is the power of SIP investments. When the market was going down from 20,000 levels to 9600 levels, lot of investors stopped their SIPs, and they were lost out from these gains.

The golden lesson is volatile market is the ideal time to reap more gains for SIP investors. Don’t stop the SIPs when you see markets are crashing. If you can afford, start more SIPs in situations like this. This is because, you will be the winner, when the markets bounce back.

If you want to make money in the stock market, you must invest when others are selling!

There are seasoned disciplined investors who feel automated SIP is dull and boring. But they invest regularly in the markets. But it may not be possible for all investors. So, for the majority, time tested SIP immediately after the salary date is the best practical option.

But if you are investing for short term goals, avoid SIPs in equity funds. Debt funds are better for short term goals.  Also do gradual re-balancing as you are nearing the financial goal to protect the accumulated amount from the last minute volatility in equity market.