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Don’t stop SIP when market crash

, October 7, 2015, 0 Comments

sip-market-marketexpress-inMarkets are crashing! Can I stop my SIPs?

Of late I am getting many calls from investors. The question is similar in most cases. With equity markets falling daily, can I stop the SIPs? Can I stop it now and start only if market recovers!

Before answering the above concern let us understand what systematic investment plan (SIP) is?

What is Systematic Investment Plan (SIP)?

It is the cousin of the Recurring Deposit (RD) with a bank! In a recurring deposit, you invest a fixed amount of say 5000 or 10,000 per month with a bank and you are getting interest on that. The amount is invested on a pre-fixed day in every month for the selected period chosen by you at the beginning. SIP is exactly the same, but the amount is invested in mutual funds. Systematic Investment Plan (SIP) is investing a fixed amount in a mutual fund on a pre-fixed day every month, without looking at the level of the market. If the markets are at high, you will get fewer units and if the markets are at low, you will get more units. We have monthly, fortnightly and even daily SIP to suit customer’s needs. You can start SIP with even Rs.500/- per month.

What are the advantages of SIP?

It helps in bringing investment discipline in you

When you are committing to invest a fixed amount every month, it helps you in creating the financial discipline. If 10,000 is deducted towards SIP on your salary day, it will ensure that you don’t over-spend. It also works on the principle of Power of Compounding as the moment you save, you are investing and hence you give maximum time to your investment.

Easy to start and flexible

You can easily start an SIP by visiting the office of the fund house or CAMS/Karvy, the registrar to the fund houses. If you are investing through an agent, he will come to your place for the documentation. Or you can invest through any of the bank branches who are also national distributors.

You have the flexibility to withdraw for any emergency or even stop the SIP by giving a written letter to the fund house. It is a flexible investment option. Now you can do investing online and that has made all process simpler and user-friendly.

Should I stop my SIP when market fall?

In a volatile market, it is always 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. In systematic investment plan, you invest the same amount every month irrespective of the level of the market. Let us assume that you are investing 5000 on 1st of every month in Birla Sun life Frontline Equity fund by way of SIPs. Let us assume that the NAV of the fund was as follows from January. 2015 to May 2015.

sip-market-tables-marketexpress-inIn this case, you are investing 5000 every month, irrespective of the NAV. In January you will get 9.803 units (5000/510=9.803) and in February you will get 9.615 units and so on. In the month of May, you will get 11.111 units. How?

When the markets are down, the NAV of the fund is also down and you will get more units like in May. But when the markets are up, the NAV of the fund is also high and you will get fewer units like in February. So, your purchase prices will average out and this will bring down the cost of units in the long term. When the markets are up, you will get the benefit by way of capital appreciation. This is the essence of SIP investing.

What happened to SIP investors during 2008 – 2010 volatile markets?

Hope you will remember the market crash in 2008 and subsequent recovery. The Sensex was at 20,000 levels in December 2007 which was an all-time high. The markets started correcting in 2008 and it has corrected by around 50%! Then it started recovering and it reached the same 20,000 levels in December 2010. In absolute terms, there was no growth in Sensex for the 3 year period from December 2007 to December 2010. Had you invested 10,000 in Sensex stocks in December 2007, it would have reduced to almost 5000 and would have regained to the original 10,000 levels by December 2010. No gains in the 3 year period!

Now, let us see the SIP performance during the same 3 year period. Assume that you were investing by way of a 1000 SIP in HDFC equity fund for the 3 year period December 2007 to November 2010. The NAV of this fund as on 1st December 2007 was 207.9210. The NAV was moving in line with the volatile markets during this period. By March. 2009, the NAV was reduced to 96.2250. Many investors stopped their SIPs seeing the reduction in NAVs. But the brave hearts continued the SIP. The NAV started appreciating with the market recovery and it reached 306.9680 in November 2010. The value of 36,000 invested during these 36 months was 64,002 as on 1st November 2010. The return percentage is amazing.

Don’t stop your SIPs in the volatile markets

A volatile market is the ideal time to reap more gains from SIP. Don’t stop the SIPs when you see the markets are crashing. If you can afford, start more SIPs in situations like this. You will be the winner when the markets bounce back.

You must invest in the equity market when others are scared. This is the success mantra in equity investing.