A systematic investment plan (SIP) in a mutual fund has some unique advantages. For example, it gives you the benefit of rupee cost averaging and this is instrumental in reducing your overall cost of acquiring units. Secondly, when markets are down you get more units and when markets are up the NAV of your fund goes up. Either ways you stand to benefit. Thirdly, you are able to synchronize your investments with your regular income and thus wealth creation is smoother. Having understood what a SIP is all about, it is also important to understand whether you should continue the SIP through all kinds of markets or probably wait on the sidelines. Remember, your SIP is a passive approach to letting quality equities and the power of compounding work in your favour. Hence technically, your SIP should continue irrespective of whether the markets are up, down or sideways.
You cannot really predict the volatility of the Nifty..
As the chart above indicates, the Nifty may have been on an uptrend in the last 5 years but then there have been a series of smaller bouts of volatility that you have to put up with. The moral of the story is that it is almost impossible to time the market and catch the low. For a moment, let us forget about timing the market, would you have been better off if you had invested in the index and held on to the money for the next 5 years. We shall look at that aspect separately. The crux of the matter is that a SIP overcomes the fundamental problem of trying to time the market. Therefore a SIP has to be indifferent to whether it is a bull market or a bear market as the idea of SIP is to passively create wealth over the longer time frame. Let us look at the benefits of continuing with the SIP in bear markets. It enables you to acquire more units at lower prices so that when the market bounces back you are holding more units at much lower average cost.
Let us experiment with live data and see the results..
If you look at the last 5 years there was a sharp correction in mid 2013, again a correction in 2014 and then another correction in mid 2015. It was only since the beginning of 2016 that the markets have been on a secular uptrend. Obviously, no investor can really be in a position to perfectly time by buying at the bottom and selling at the top. How do we resolve this issue?
In our experiment below we have taken 4 different MOSL funds from the date of inception. We have assumed that an investor does a SIP of Rs.5000/- per month on each of these funds from the date of inception and does not really do anything else. On the other hand, another investor decides to buy the Nifty on the date of the fund inception and holds the Nifty till the current date. How these two investors compare over a period of time?
Data Source: Value Research
In each of the above fund cases we have considered two different scenarios. Under the Nifty Returns, an individual has bought the Nifty exactly on the date of the Fund inception. That Nifty is held till date. In the second case the investor simply allocates Rs.5000 each month to the specific fund from the date of inception. This experiment was done for each of the above four funds of Motilal Oswal. To avoid complexities, we have considered the Growth plan in all the cases. What is the outcome?
Despite 3 bouts of bear runs in the market during the five year period, in all the cases the SIP is easily outperforming the Nifty. Out of the four funds considered here, the least outperformance by the mutual fund SIP is of the MOSL Mid Cap 30 fund where the SIP outperforms by 2.41% annualized since inception. In case of the MOSL Focus Long term fund, the outperformance is as high 19.04% for the MOSL SIP.
Let us look at the specific case of MOSL Focus Long Term Fund to understand the reason. The fund started in Jan 2015 when the Nifty had rallied sharply. Thus the Nifty point-to-point returns were fairly muted. On the other hand, the SIP on the MOSL Focus Long Term Fund made the best of the prolonged 1 year bear market. That, probably, best explains the merits of continuing with your SIP and not to worry about trying to time the markets.
No one catches the market top and bottom consistently..
In the stock markets it is popularly said that if an investor claims to have caught all the bottoms and tops of the market then either he is God or he is a liar. A SIP in bad times will, in fact, work much better for you! The answer is to continue with your SIP irrespective of bull or bear markets. Over the longer period of time you will better off that way than trying to time the highs and lows of the market.