One can always apply for a temporary stoppage of SIP when the markets scale highs. They can avail of SIP-stoppages for two-three months at one go if investible surplus dwindles due to unavoidable circumstances. Many mutual funds offer the temporary stoppage option. It is always prudent to look at the fine prints before investing to know if stoppages are allowed and for how long.
“They (the investors) should make it a point to resume regular investment once financial conditions have improved,” says Aniruddha Chaudhuri, Head of Retail Business at ICICI Prudential Asset Management Company.
He, however, warns that one should not invest in SIPs without a goal in mind. Goals can be a child’s higher education, buying homes, marriages, or retirement. Goals give SIPs a purpose and inculcate a sense of responsibility that propel investors to continue their investments. A goal also provides a time frame.
Ashwin Patni, Head of Products and Alternatives at Axis AMC, however, says goals need not be something tangible. Instead, it can also be a target to accumulate a certain amount of wealth over a specific period. “A goal and a tenure are good enough to invest and stay invested in SIPs,” he says. Investment in SIPs for accumulating funds for post-retirement expenses come with the option of auto withdrawal after a specific duration. This can be matched with the retirement age. While for the salaried, it would be either 58 or 60, for self-employed professionals or businesspersons, it could be 70 or even 75. Once retired, auto withdrawal of SIPs start. “The moment a goal and a term are defined, for the majority of investors, any day can be the day to start investing in SIPs,” says Chaudhuri.
India Inc is poised to leap forward. The government aims to make India a $5-trillion economy by 2030. Niti Aayog Vice-Chairman Rajiv Kumar says the India story, despite the Covid-19 woes, remains “very strong”. He expects the economy to register double-digit growth in the current fiscal. Moreover, the country is better prepared for an anticipated third wave of Covid-19 as states have learnt their lessons from the previous two waves.
“The economy is slated to grow at a steady pace. So, if retail investors believe in the growth story, this is the right time to invest in shares via this instrument for SIPs take away volatility out of stock investments in the long run,” says Chaudhuri.
“The more volatile the market, the higher the returns on SIPs,” points out Parija, from IDFC AMC.
“The last 18 months were characterised by extreme volatility,” says Patni. “This makes it the perfect time to start a SIP. It is an excellent tool for long-term savings irrespective of market conditions.”
While SIPs are one of the best avenues for investment in the stock market, every expert believes the longer the term for reaching a goal, the better the returns. It offers the benefit of rupee cost averaging. When money is invested in stocks over a period, in instalments – monthly in case of SIPs – one accumulates units at various prices called net asset value or NAV. A subscriber receives more units when the market is down, and the fund’s NAV is lower. Conversely, you get a lower number of units when the market is up, and the NAV is higher. Over time, as the SIP progresses, one would have invested across all market phases, and the average cost would be reasonable.
Let us assume that one invests Rs 20,000 every month in a fund at NAVs of Rs 200, Rs 250, Rs 150, Rs 100 and Rs 300 for five months. In each of these months, one will have accumulated 100, 80, 133.33, 200 and 66.67 units of the fund, respectively. While the total investment in these five months would be Rs 1 lakh, units accumulated would be 580. Its average cost works out to Rs 172.41, an amount less than three of the five monthly NAVs.
“Do not look at NAVs daily,” insists Chaudhuri. “A volatile market tends to change NAV rapidly over a short period. However, this should not deter an investor if the investment horizon is in the long run.”
According to Patni, many investors have learned not to pay too much heed to the regular roller coaster of the stock markets. For they do not affect SIP returns much.
Significant corrections are triggered when large investors move out of the markets. However, such moves by prominent investors, including foreign ones, are executed over long gaps. Last year, however, was an aberration and a volatile market tend to move sideways with a very gradual build-up. Instead of falling prey to retail investors’ herd mentality when stocks tank, one should continue with SIPs. Through both ups and downs of a market cycle as the market always rises in the long run. While three years should be the minimum horizon for any mutual fund, Chaudhuri suggests at least 10 years for retirement planning. After which, a systematic withdrawal plan could be the best combo.
Parija says investing in equities through SIPs for three to five years does not always work well. It needs to be a minimum of four-five years. In these four years, you continue investing, and it grows into a habit.
To avoid a contraction in accumulated capital following a crash towards the end of one’s horizon, an investor should gradually shift away from equity to debt funds as the goal nears. Although debt funds generally offer lower returns, compared to equity funds, these do not fluctuate as frequently as equity funds. Thus, debt funds help preserve accumulated capital towards the end of the tenure. In fact, for a shorter duration of, say, a year, one could consider debt funds.
“Let’s say an investor has a 10-year horizon for accumulating funds through SIPs, which will serve as a retirement kitty. But, after the ninth year, they should switch to a debt or balanced fund to preserve accumulated capital,” says Chaudhuri. And, the current market scenario with volatility as a daily phenomenon, it is the right time to start investing in SIPs.
“Markets are expected to remain volatile in the next one year. Therefore, it is opportune to invest in flexicap new fund offers (NFO) where deployment is executed in a phased manner, reducing volatility in returns. In addition, one could also consider balanced advantage funds,” says Chaudhuri.