Sensex close to kissing record highs: Is it time to stop your equity fund SIPs?
Investing at market peaks at the dotcom bubble in 2000 and the global market highs of 2007 would have given good results, had you stayed invested. But you get better returns if you keep some cash aside to jump in at every correction.
LISA BARBORA NOVEMBER 23, 2022 / 10:10 AM IST
Continue your SIPs even in rising markets. If you exit now, you may not be able to re-enter at the right time
Continue your SIPs even in rising markets. If you exit now, you may not be able to re-enter at the right time
At 61,418.96 points (as of November 22, 2022 closing day), the S&P BSE Sensex is within kissing distance of its all-time peak level of 61,795, hit on 11th of November 2022.
That hasn’t deterred investors from rushing into mutual funds (MFs). Monthly inflows through systematic investment plans (SIPs) into MFs is at its highest-ever — at a little over Rs 13,000 crore a month, as per the October 2022 figures put out by the Association of Mutual Funds of India (AMFI), the MF industry’s trade body. Bulk of this goes into equity funds.
Clearly, retail investors are excited about equities, despite a sharp correction in global equities and our own market peaks.
While conventional wisdom says you should continue your investments despite market levels — and that is precisely what SIPs are meant for — you cannot deny that you are buying expensive, and not cheap, equities.
So is it better to pause your SIPs now?
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Starting a SIP at market peaks
We looked at what investors could have gone through, had they started a SIP when the market was at an interim peak. The two time periods considered are the market peaks of 2000 (the Information Technology run) and 2008 (global bull market run). To keep things simple, assume that you invest in the CNX Nifty 50 index.
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Had you started buying Nifty in March 2000, the month in which it touched its peak value of 1,712 points and continued through the correction till the next time it touched the same peak in December 2003 (that’s three and nine months later), you would have earned 1.4 times the money invested or an internal rate of return or XIRR of roughly 20 percent. XIRR is a form of calculating returns on investments where there are multiple inflows (fresh investments) and outflows (redemption); in SIPs, units are purchased periodically at different times. This is assuming you invested a fixed sum of money every month through this period.
Moneycontrol looked at what investors could have gone through, had they started a SIP when the market was at an interim peak.
Moneycontrol looked at what investors could have gone through, had they started a SIP when the market was at an interim peak.
According to Shyam Sekhar, Chief Ideator and Founder, ithought Advisory, “Retail investors are historically under-invested in equities, and more so when the markets turn favourable. While continuity of investments, regardless of market position, is crucial, it is also important for incremental buying at the ‘wrong’ time.”
Want more proof?
Had you started at the market peak in January 2008 at 6,150 for the Nifty50 and remained invested through the correction till October 2010, when the market reached the same level next, your investment would have gone up 1.4 times and your return would be around 25 percent (XIRR).
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Here as well, we assume you have invested in MFs through SIPs every month, till October 2010. Note that here you would have earned 25 percent (XIRR), as opposed to 20 percent (XIRR) during the 2000 peak level we told you before.
Every correction from the peak will be different and the time taken for the markets to recover will be different. Your SIP return in the period depends not just on the time you remain invested but also on how much the market corrects and how long it remains there.
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Of course, it works out better if you start your SIPs when markets are low and then stick around all through the time the markets rise. But that is easier said than done. Nisreen Mamaji, CFP and CEO, MoneyWorks Financial Services, says: “The objective is to beat the benchmark and earn more than fixed income returns to create wealth systematically over time. Goals are important too and any short- to medium-term goals should not be addressed with allocation to equity. Can take tactical risks, if the ability is there, but only with a small portion of the portfolio.”
Keep some spare cash ready
The flipside of stopping your SIPs when markets hit the peak is that it might take a lot longer for you to re-enter equity markets. Returns from equity doesn’t just depend on the share prices of the underlying companies your MF holds. It also depends on the amount of time you stay invested in the equity markets.
Secondly, it is futile to time the market. Today, the Nifty is around 18,400. Compare this with the peak of 2000, of around 1,712: it’s almost a 11-fold gain, point to point. This shows that long-term investing is a reality, not a myth.
Sekhar says one can strategise by keeping some idle cash ready to invest at any time: “An investor may correct the choice of buying equity at market peaks by investing more diligently at lower levels. Being all-in or all-out of equities is not going to work at the extreme ends of a market cycle,” he said.
Between March 2000 and November 2003, the Nifty 50 had fallen to as low as 854 points in September 2001. Had you doubled your SIP to take advantage of the lower market level, your investment value would be up from Rs 5,40,000 to Rs 8,52,000 or 1.6 times in 2 years and 2 months.
While it’s understandable that not everyone can double their SIPs, the point is that having some idle funds at the right time can be very beneficial to overall investment returns.
When markets correct sharply, one way out is also to be a bit flexible and stay on for a little longer than you had anticipated.
Take the case of the 2000 market peak. If you had continued SIPs for five years, despite starting at a market peak, the return, by March 2005, would have risen to 19.25 percent XIRR. If you had waited for eight years, the return from SIPs, till March 2008, would have been 25.3 percent XIRR.
Investing at market peaks at the dotcom bubble in 2000 and the global market highs of 2007 would have given good results, had you stayed invested. But you get better returns if you keep some cash aside to jump in at every correction
Investing at market peaks at the dotcom bubble in 2000 and the global market highs of 2007 would have given good results, had you stayed invested. But you get better returns if you keep some cash aside to jump in at every correction
According to Mamaji, “It’s important to stay invested and take advantage of market corrections by continuing one’s SIP. Loss on paper can be recovered only if you stay invested and not if you redeem and realise that loss. In the long run, the volatility smoothens and market levels are not so relevant.”
Moreover, your equity return expectation each year can be different from the previous, depending on the macro environment. Similarly, the expectation extrapolated for a decade will also be different in different economic cycles. For example, for the decade starting 1991, the equity return expectation was a lot higher than for the decade starting in 2010, owing to the economic cycle and macro conditions of the times.
If you are still wondering whether to continue your SIPs, given the market peak, here’s a quick summary
Continue your SIPs even in rising markets
If you exit now, you may not be able to re-enter at the right time
Equities do not work if you need the money within a year or three.
Keep some cash handy. When markets correct, put in some lump sum
Investing at peak markets? Be mentally prepared to stick around in equities, for a little longer.
How long should you stay invested in equities? At least five years.
LISA BARBORA is a freelance writer. Views are personal.
TAGS: #invest #investment #mutual fund #personal finance
FIRST PUBLISHED: NOV 23, 2022 08:36 AM
