Markets Are Surging – Is It Time To Stop Mutual Fund SIPs?

The SENSEX has soared past 32,000 and the Nifty is on track for 9800. The markets are at an all-time high and more funds are flowing in from investors – institutional, retail, domestic, and foreign.

Over these months, retail investors who have been investing in mutual funds through SIPs have made handsome gains. However, they are skeptical about continuing SIPs. Advisors are faced with queries from clients who reason that every subsequent buying is happening at higher NAVs and this results in fewer mutual fund units being bought. Is it wise to continue? Or should we wait for the market to correct so that we can buy again?

Of course, the basic investing premise is to buy at low prices and sell at high prices. But then, another truth about markets is that it is cyclical in nature and the bulls and the bears are a part of markets. Let us look closely at how SIPs work well in both scenarios:

Bulls Run

 If the markets remain north bound, every new SIP investment would happen at a higher NAV compared to the previous buy, and the corpus will continue to grow with the market. Even if the market hits a plateau, investments in actively-managed funds will offer good returns. Since the markets are unpredictable, one should board the flight without further delay.

Bear Phase

 If the market tanks in the near future, the value of early SIPs may suffer, however during the market correction, more units will be bought at lower prices to average out the cost (Rupee Cost Averaging). In the long-term, most SIPs in actively managed funds yield good returns. Hence, it is also wise to continue SIPs when the chips are down.

SIP Route Earns Lower Returns Than Lump Sum Investment

Clients often cite examples where SIP returns have been lower than the lump sum investment. For starters, it is easy to look back and connect the dots. There is no way to accurately predict the market movement before investing. By investing smaller amounts, we are spreading out the risk. Also, it must be understood that time in the market is more important than timing the market.

There can be two reasons for low returns from SIP – first, if the SIP was started during a bull run and stopped after two or three years when the markets bottomed. The second case can be that of discontinuation of the SIPs when markets move in a bell curve. Investors often give up and abandon ship when the market is nearing its bottom, only to miss the ensuing rally.

SIP is for the Long Term Keep Monitoring Regularly

In India, a typical market cycle lasts for five to six years, mapping the bull run to bear phase, and back again. Hence, it is necessary to examine the fund performance across a full market cycle. The role of the advisors is to regularly monitor fund performance and to educate clients about the value of disciplined investing.

 

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