Here’s Why You Shouldn’t Stop Your Equity SIP Just Yet
If you’re an equity investor, chances are the recent slide in the market has made you a little worried. It’s also possible that you’re none too pleased about the returns over the past year or two.
That’s understandable. The benchmark Nifty 50 Index lost more than 1,200 points in just over a month, having touched a lifetime high of 12,088.5 at the start of June. Worries about economic growth persist and foreign investors continue to hit the sell button. In fact, since April last year, the Nifty 50 has gained over 7 percent.
Adjusted for inflation and taxes, that isn’t much of a return at all.
But financial planners advise that small investors shouldn’t get fazed by this, and instead treat this as an opportunity to accumulate if their requirement for funds is at least five years away.
“You have to go back to the objective you had when you started the SIP (systematic investment plan),” said Harshvardhan Roongta, founder of Roongta Securities. The purpose of a systematic investment plan, he said, is to allow an individual to invest even if they don’t have a large amount of money set aside. It is also a great way to average the cost of purchasing equity.
“You’re doing an SIP because you don’t know which way the market is going to go. But, you have an underlying belief that the Indian economy is growing, and you want to be a part of it. If you were absolutely certain that the market was only heading higher, you’d sell everything and put money in the market,” said Roongta.
Financial planners usually advise investors to choose equity if their requirement for funds is over five years away. That’s based on the expectation that economic cycles usually take more than five years to play out.
“I tell my clients that in the stock market, many times 80 percent of returns come in 20 percent of the time,” said Gajendra Kothari, managing director and chief executive officer of Etica Wealth Management.
Kiran Telang, a SEBI-registered investment advisor, concurred. “I come from a goal-setting and asset allocation perspective. If you have a goal that is 10 years away, this is a good time to buy (equity).”
The thing is, many retail investors who’ve chosen to participate in India’s growth story in the recent past haven’t yet seen a full cycle for either the equity market or the economy. They most certainly haven’t seen the crash that took place when the global financial crisis of 2008 struck.
Why SIPs Work: An Illustration
Here’s an illustration using data compiled by JRL Money that might put things in perspective.
Assume you put a lump sum amount in HDFC Equity Fund (Growth), a multi-cap fund, on Jan. 1, 2008. Not long after that, when the shock waves emanating from the U.S. and European markets hit India’s shores, the losses start accumulating. By the end of the year, your lump sum investment would be worth 56 percent less.
Instead, if you had averaged your cost of acquisition by buying every month through SIP, on Dec. 1, 2008 your investments would be lower by 35 percent.
Just a few months later, if you’d have continued your SIP, in May 2009 your investments would only have been 3 percent lower, while the lump sum investment would still be worth 41 percent less. And that month would have been a turning point for your monthly investments.
By the end of 2009, your investments via SIP would have gained 52 percent, while your lump sum investment would only just be breaking even.
It goes without saying that if you’d have pulled out your funds when the going was toughest, you’d have lost a large portion of your investments.
The Rise Of SIP Culture
The last couple of years has seen a surge in retail participation in equity markets through SIPs.
Total SIP contribution, which includes equity investments, stood at close to Rs 44,000 crore in the financial year ended March 2017, according to Association of Mutual Funds in India’s data. In the next fiscal, aided perhaps by the government’s demonetisation in November 2016 and the launch of the “Mutual Fund Sahi Hai” campaign, SIP contribution rose by more than half to Rs 67,190 crore. And in 2018-19, SIP contributions rose by a further 38 percent to Rs 92,693 crore.
This higher contribution, AMFI said, has been supported by a large number of new investors joining the fold. The mutual fund industry added, on average, 9.5 lakh SIP accounts every month in the ongoing financial year with an average monthly investment of Rs 3,000, according to a release from the mutual fund lobby earlier this month.
When Should You Stop Your Equity SIP?
There are instances when you should consider stopping your equity investments. Foremost among these is if your goal, or the reason you need the funds, is drawing near.
As a standard practice, it’s a good idea to shift out of equity and into debt investments if your requirement for funds is less than two years away. One such hypothetical scenario is if you started an equity SIP in 2011 with the intention of buying a house in 2021. With your goal drawing near, it is a good idea to stop your monthly contribution and shift your funds to a less volatile investment — either a debt mutual fund, or a fixed deposit.
“This should be done irrespective of market condition,” Roongta said. “If you’ve reached near your goal, despite being tempted to stay you have to liquidate. If your goal can’t be pushed, you should insulate your gains.”
Another instance when you should stop your SIP is if the mutual fund scheme you’ve invested in is consistently underperforming the benchmark equity index. A good thumb rule to follow here is to set your expectations when you start your investment, and review the performance of the scheme periodically.
For a large-cap mutual fund scheme, the comparable benchmark equity index would be the Nifty 50. “If your goal is 10 years away, look at the returns the Nifty 50 has given in the last 10 years to get a sense of what the scheme should ideally give you,” Roongta said.
If you’re unsatisfied with the performance of a scheme, Roongta said you could stop your SIP in that scheme and shift it to another but “avoid withdrawing the funds if your goal is still far away”.
“There are tax implications and exit load to contend with if you choose to withdraw prematurely,” he said.