Everyone knows that starting a Systematic Investment Plan (SIP) in an equity mutual fund scheme is the best way to achieve long-term financial goals. However, the strategy is likely to be tested in the coming days if the market scales new highs every week as some experts are predicting. Surprised? Well, here is the scoop: a "secular" rising market is not a great news for your SIP investments.
"SIP investors may lose returns in a rising stock market," says Rishabh Parakh, Chief Gardener, Money Plant Consultancy. You may have heard the SIP sales pitch: when you invest regularly irrespective of the market conditions over a long period, the ups and downs in the market help you to average your purchase cost. This helps you to make long-term investments in a disciplined manner without worrying about prevailing market conditions and maximise returns. In a rising market, the story unfolds a little different: the same strategy would push up your purchase cost.
For example, the NAV of the scheme increases from ₹ 100 to ₹ 110 and ₹ 120 in three months due to the rising market. The average purchase cost would be ₹ 110. On the other, assume the NAV to be ₹ 100, ₹ 110 and ₹ 105. The average purchase cost would be ₹ 105.
Worried? Well, this is strictly applicable only to a "secular" bull market. That is, a market that is moving upwards day after day or week after week. But that is not how the market always move. Even when it is on an upward march, there could be minor corrections because of profit taking or nervousness among market participants.
Anyway, suspending your SIP is not the best strategy to tackle a rising market. "The basic principle behind SIP investments is that you don't decide the entry or exit points. SIPs should continue on auto pilot," says Rajeev Thakkar, CIO, PPFAS Mutual Fund. "You should not try to stop it temporarily and then invest a lumpsum or anything of that sort," he adds.
The point is the moment you try to time your investment based on the prevailing trends in the market, you are walking into a minefield. This is because it has been proven beyond doubt that it is almost impossible to predict the market for a very long time. Some patchwork strategy like "get back once the market corrects 10 per cent" may sound appealing, but the trouble is that you never know when it would happen or whether there will be further corrections.
So, what should an investor ideally do in such a scenario? The answer is very simple: nothing. As Thakkar indicated, the moment you start tinkering your investment plan because of market conditions, you are defeating the entire purpose of having a plan. This doesn't mean that you should lose money at the cost of sticking to the plan.
Just remind yourself that you are investing in equity to meet your long-term goals. And a secular rising market for a few months or a year is not going to alter the scenario significantly when you are investing for seven or 10 years. "A market cycle of three years usually sees both upward and a downward trend," says Vidya Bala, Head-Mutual Fund Research, FundsIndia. Her point: it is highly unlikely that the market is going to rise continuously for three years. There would be some falls and you may benefit from them if you continue with your SIP investment. ""In equities, ideally you should run your SIPs for three years. It is typically a time frame that we have seen in the past where you go through at least one up cycle and one down cycle," says Bala.
The original article could be seen here.