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A Top-Up SIP Is The Best Option In Times Of Volatility

An investor should plan the savings because any investment without a goal is purposeless, says Swarup Mohanty.



An investor scratches her head as she watches the drop in share prices. (Photographer: Kevin Lee/Bloomberg News)
An investor scratches her head as she watches the drop in share prices. (Photographer: Kevin Lee/Bloomberg News)

A typical investor behaviour is to stop systemic investment plans or reduce the amount saved if the market falls or is volatile. They should do exactly the opposite of that, according to Mirae Asset Management.

A Top-Up SIP Is The Best Option In Times Of Volatility

An investor should plan the savings because any investment without a goal is purposeless, Swarup Mohanty, chief executive officer at Mirae Asset Global Investments (India) Pvt. Ltd., said on BloombergQuint’s Mutual Funds Show. Market volatility works in favour of the systematic investor, said. Top-up plans will invariably give higher returns compared with a simple SIP, he said.

A Top-Up SIP Is The Best Option In Times Of Volatility

Return on equity generated by the top 500 corporates in India stands at 11 percent, down from 23 percent in 2008. “I believe normalisation to take place in the coming quarters,” said Harshad Borawake, head of research, Mirae Asset Global Investments.

Swarup agrees that an SIP should be revisited only if the funds have underperformed than what was set at the time of defining the goal.

Here’s the full interview:

What should investors do when things turn to be volatile in market?

From a personal finance perspective, it’s very important to plan your investments. Investment without a goal is a purposeless investment. First is to know why he or she is investing, then the rest of the journey becomes very easy. It is easy to work backwards when you know why you visited it in the first place.

We believe that no SIP should have started without a purpose and goal in mind. When markets become volatile, contrary to what a new investor might think works in favor of SIPs. Involatile will always lie the opportunity. When the market starts going lower the scene changes from money to number of units you accumulate, and more the units a person accumulates, the higher his return probability will be on the rebound of the markets. If I were a SIP investor, I would have look for markets to go down lower then the markets to go up. If the markets go up, you accumulate higher NAV in that process and you don’t get rupee cost averaging which we talk about as one of the best benefits of SIP.

Markets will continue to have a good run over the course of next 5-10 years. Is that the basic presumptions which people should go with, if indeed you go down the path of topping up your SIPs or staying in path in country like India?

In the last five years, while the headline economic numbers where good, I think the companies were not doing that great. Last time in FY08, that was the time when Indian corporates, let’s say top 500 companies, did a ROE of 23 percent. Now India, as a whole, is doing ROE of 10 odd percent. In terms of earnings from a corporate point o view, we are at a cyclical lows.

If we want to take next five-year view, one is the normalization which will happen. Last year was disruption given by demonetization and GST. Next year, there is a base effect, there is a normalization which is going to happen. With 12-18 months down the line, we will start looking greenfield capex which is upset from some time. In three-year view, things are good. Base effect will give earnings the propel this year.

After that when capex starts coming in, then I think things will be much better. Coming to economic indicators, while there are some headwinds on some of the economic indicators but in three-year view this should normalize with that time horizon. 3-5 years view is much better than last 3-5 years.

Does stating goals help investment?

It definitely helps. Because if you don’t have a purpose then you fall into the trap of lot of mutual fund investors becoming return chasers. You come with a premise that you will invest in a good fund. But it is impossible to be invested in the best fund perpetually. It is inhuman to invest in best fund year on year because the markets are cyclical, dynamic and so positions might change.

While you change it to your purpose, then you define your investment. When you buy a house, you know you want to buy a 3BHK or 2BHK depending on your choice and want. Similarly, when you are doing an SIP, you need to know why you are doing that SIP. Many people tell us it is for wealth creation but define that wealth. Between you and your advisor the path becomes easier. For your goal may be such that you did not might invest in that equity. You could want SIP and debt which will solve your purpose. If you do that then your investor experience increases, it becomes far more better. You should be a goal chaser rather than a return chaser.

If switches happen consistently between funds, will it effect the power of compounding?

Let’s say it is a single category, large or midcap fund. If I have to invest in more than three or more funds, I think it could be unnecessary diversification per se. When you invest in any fund, you should look at the fund manager’s track record or the cycles which he has performed.

Six months or one-year under performance should not matter as long as that fund manager has managed that fund over the cycles. Markets can be volatile, and they can’t be as you want in short period of time. But over the years, if the fund has proven its track record then you should stick to it. Unnecessary one should not diversify with a six months under performance.

How would investors benefit when they understand the concept of rupee cost averaging?

Rupee cost averaging is a basic concept of averaging, and nothing rocket science about it. The more you buy at lower levels, the more you benefit in the long run.

Let’s look at the India opportunities, a classic example. You started at Rs 10 in 2008, it went down to as low as Rs 5, and today it is at Rs 50. So, somebody who would have invested across, while the investment would have gone from Rs 10, point to point would have been 10-50, but look at investment from Rs 540 to 50, it would have given far better return than the fund itself is giving. If you catch the entire flow from Rs 10 to 540 to Rs 50, it could result in a far superior return than point to point could have given. That’s how rupee cost averaging works.

If you look at some volatility in the markets, and the markets go down, your SIPs start picking up and those NAVs are at lower level, then you start picking up more amounts of units in that lower NAVs. On the rebound, that plays out. Classic example is 2008-2009. As per data, 60 percent of SIP has stopped then because the markets plummeted after the crash. If those SIPs have remained till 2010, then they could have doubled the money. We are not seeing such kind of behavior this time around. People are staying put. The lessons from 2008 has percolated down to each one of us. Some of those you have stopped SIPs are staying in put. Till now, the data is secure. The key lies in future and us communicating in a very convincing manner that if they continue staying invested, and not deviate from the purpose or the goal, their goals will be achieved through this asset class for sure.

How volatility and time impact returns?

If you invest for a short term like 1-3 years, and if markets are volatile at that time, then not necessarily you will get desired returns. But the moment you increase the horizon of investment, which equity investors should do. If you have less than three years investment horizon then you better don’t come in equities.

If you increase the horizon for 5-15 years, then the volatility in market gets taken care off. Even the ups and downs cycle get taken care off. Even if you buy at a top five years back and if you want to redeem at the bottom ten years later, still at that time horizon you will make money. The higher the time of equities the better chances you have to make better returns.