When market falls, it tempts you to stop your sip! Like since February market is falling, and your portfolio must be showing in Red. Obviously! Any retail or new investors will be afraid of seeing his portfolio and would always think to stop the new investments (Stop the sip) and withdraw the invested money. However, this isn’t the time to stop SIPs. Why?
For SIP to be effective and deliver the entire potential returns, it must go through all the market phases.
There can be three possibilities for the market going forwards:
- Market may go further
- Market may go down
- Market may remain range bound
Let us now discuss, Why You Shouldn’t Stop Your Mutual Fund Sips in the Falling Market or Rising Market
If you continue your SIP in the Rising market, you purchase Units (Mutual funds) at higher price (This is contrary belief of stock market mantra i.e.- Buy at lower prices and sell at higher prices).
In rising market your sip will get invested at higher prices but that would be lower than the peak of the rising market. Therefore, you constantly stand to benefit in the long run because even if the market falls in the future, it will gradually recover and make new highs (higher than the current high).
Let’s assume if you had invested sip of Rs 5000 (Sip of Nifty index) in year 2000 rising market and stopped the sip at 2008.
You would have invested, near about 5,25,000 but fund value in 2018(5th October 2018), could be near about Rs. 4,190,062.50
let’s now talk about the second situation- a market correction or bear market. Bear market or falling market would always be stressful for all investors, such as new investors who recently started SIP in January (these investors started SIP on the say of their friends, like in 2017 equity market has given return of 30%+, and in the same way they think, will get the opportunity to get that much return in 2018).
you are very likely to see your investment decreasing in value each week, even if you keep investing through SIP. But if you keep psychological anxiety apart, then falling market (Like it is running currently in 2018) is the perfect condition for the long-term SIP investors.
Investors will buy units of mutual fund at lower cost at a bear market or in correction. Continuing your sip will eventually average your cost of mutual fund units (Like in rising market, say you purchase 1 units for 100 Rs and in falling market you purchase same fund units in 80 rs so your average for 2 units would be 90 Rs).
Hence, continuing your Sip in the bear market will usually reward you fantastic results in the long terms.
Let us share an example of two investors who invested in the same funds:
Investor A continued his SIP in the financial crisis of 2008 and investor B waited for the market to recover before beginning his SIP.
In 2008, the market started falling in January and continued falling for the next 15 months – the market fell more than 60%. Investor A started a monthly SIP of Rs 5000 in January 2008 in Large Cap equity funds and continued till today. His investment value/corpus today (5th oct, 2018) will be approximately Rs. 14.73 Lakhs while the money he had invested was only Rs 6.5 Lakhs.
Investor B on the other hand, waited till the middle of 2009 for the market to stabilize before investing in the same fund. He started a monthly SIP of Rs 5,000 in May 2009 in same large cap equity fund and continued till today. His investment value/corpus today (5th oct, 2018) will be around Rs 11.5 Lakhs, while the money he had invested was Rs 5.7 Lakhs.
Comparing the two examples, we can safely say that just by investing around Rs 80,000 in the falling market, Investor A made an additional profit of more than Rs 3.23 Lakhs.
Warren Buffett, has time and again emphasized on long term investment benefits. His quote- “If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes” gives you gravity about importance of holding an Equity portfolio or stocks/Equity mutual fund for long term.
When we talk about the long-term equity investments, we mean give time or period to your equity investments and continue with it in all market phases to get the opportunity of rupee cost averaging.
These kind of investments (Equity) have historically proven to generate wealth then short-term investments.