NEVER STOP YOUR SIPs

Renjith RG

EQUITY investing delivers in the long term and historically this is proven. Markets had seen many structural bull runs in the past, but they had intermittent corrections triggered by various reasons. Every correction was a great buying opportunity. SIPs are the best strategy of investing in equity markets for the long term. Investors who have started SIPs are now experiencing the opportunity of cost averaging which is very crucial for higher compounding effect in the long term.

It is utmost important to continue the SIPs during downturn of the markets, as it provides a natural opportunity to buy more units at lower cost. This would help tremendously when markets gain new highs in the long term.

Equity investing has historically proven to have delivered returns better than other asset classes. But it comes with an inherent quality – volatility. This fluctuation, especially the downside, creates an element of fear in the minds of investors and makes them stay away from equities. Systematic Investment Plans (SIPs) help investors acquire units of mutual funds in a regular and stable manner, thereby averaging the cost of investment over longer term.

SIPs are gaining much prominence and significance among the equity investors, as a convenient route for creating wealth amid market conditions without having to worry about timing the market. SIPs work on two key principles — cost averaging and power of compounding. Cost averaging is a process of averaging out per unit cost over the tenure of investment. In SIPs since you are investing a fixed amount every month irrespective of the fund’s NAV, you get to buy more units when prices are low and buy fewer units when prices are high. In the long run when markets gain new heights as it has done in the past, compounding helps in creating wealth across all the units purchased.

An analysis of SIP returns across all schemes shows that, as of August 31, 2017, the average CAGR of a 10-year SIP is 14.78%, across 211 funds and for 15-year SIP, it is 16.06%, across 99 funds.

In other words, if an investor did an SIP of Rs 5,000 for 120 months, it compounds to Rs 12,99,663 at 14.78%. The same swells to Rs 30,23,529 at the same rate of return, if the investment is made for 15 years. What you have noticed is precisely right, it more than doubled. That’s the power of compounding.

Investors can enjoy the long-term returns from SIPs only if they continue to invest and stay the course. Stopping the SIPs when markets are down, thinking it will never recover or pausing when markets inch higher thinking it will correct, will only create a break in the wealth creation process. In essence, stopping SIPs or exiting an active SIP investment in a down market is a bad idea and we should ideally avoid doing that. What we have seen is, markets with all its volatility, correction and recovery, has grown and created long term wealth over a long period of time.

The writer is Associate Director, Geojit Financial Services. The views expressed in this article are his own