By Anurag Garg
Markets are at an all-time high with Sensex touching the 60,000 mark for the first time since its inception and Nifty 50 hitting the fresh all-time high of 18,000. The market has more than doubled since the crash in March 2020 on the back of liquidity and a low-interest rate regime.
As the markets sit at an all-time high, there could be many questions in the minds of investors – Whether to continue investing? Whether to book profits and wait for market correction to buy back? Whether to keep investing via SIPs in mutual funds or stop SIPs?
The very purpose of SIP in mutual funds is to take advantage of investing in equity irrespective of market cycles. ‘Rupee cost averaging’ is the time-tested concept that helps investors earn superior returns if they continue to invest over a longer time horizon. Through SIP, the investor buys more units when the market is low and fewer units when the market is high, thus averaging his costs over a period of time. Since it is impossible to predict the future market trend (who had thought markets would almost double in the last 18 months?), and markets are volatile, it is simply the best practice to continue investing in mutual funds through SIPs without worrying about market conditions.
Investment through SIPs in mutual funds should be based on an investor’s financial goals and ability to save and not the changing market prices. Timing the markets can prove to be counter-productive for investors. Stock markets are volatile and ups and downs are an inevitable part of investing in equities whether directly or through mutual funds. Timing the market would be a bad decision as waiting for the market to correct to start investing would result in a loss of opportunity. Hence, investors should continue with their investments in mutual funds when the markets are high as the market will eventually go up and so will the mutual funds’ returns.
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While the stock market might appear to be high in the short term, an investor does not know when the rally will continue till. Therefore, sitting on cash or redeeming all your mutual funds investments just because the market is touching an all-time high are not good options. Investing in lumpsum could always be a problem if markets correct significantly all of sudden. Hence, it is wise to approach the investment through SIPs in mutual funds as they are professionally managed, offer diversification benefits, lowers the cost of investment, are liquid, and have the potential to generate attractive returns.
Investors who continue to invest in mutual funds through SIPs will benefit whether markets continue to go up from here or if there is an interim correction. We can understand the same with an illustration below:
Let’s understand this via an example. Let’s assume an investor started a SIP of Rs 10,000 in the HDFC Index Fund- Sensex Plan in October 2011. By investing Rs 10,000 every month, the investor would have made a total investment of Rs 12,10,000 in this fund as of October 2021. The investor would have accumulated a total corpus of Rs. 28,25,451 as of October 2021. Markets remained volatile during this period but kept growing over the period. Even after investing in all the highs and lows of the market, the SIP of the investor would have grown at an extended annualized return of 16.09%.
Investing via the SIP route will help the investor limit his market risk by spreading his investments over time whereas investing a lump sum amount is a high-risk high-reward investment that can be dangerous. Even if the market falls causing a sell-off in the market, an investor can be assured that the market will rebound sooner or later. When an investor invests via SIPs in mutual funds his wealth gets compounded and investment costs average out over a period of time, taking the investor closer to his financial goals.
Over the years, the investors have learned to understand the market highs and lows and continue their monthly SIPs. This consistent discipline has helped the investors to build a healthy corpus and achieve their goals. SIPs have thus inculcated disciplined investing amongst investors regardless of the market disturbances.
Investors investing through the SIP route have enjoyed excellent returns for the past 8-10 years. SIP inflows have rapidly increased, investors are now pumping in close to Rs 10,000 crore every month through this option compared to Rs 4,500 crore in 2017.
(Anurag Garg is the Founder and CEO of Nivesh.com. Views expressed are the author’s own. Please consult your financial advisor before investing)