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How SIP in Bad Markets is useful?

Investment in a Mutual Fund SIP is considered quite similar to a recurring deposit. While in a Recurring Deposit the specified amount gets deducted every month and gets deposited into a bank deposit account, in a SIP, the amount chosen gets deducted every month, weekly, or fortnightly, as selected by the investor, and gets deposited into a mutual fund chosen by the investor for a specified period of time.

There are several perks of investing in a SIP that make it a popular choice among investors today.

Benefits of Investing Consistently in a Systematic Investment Plan

Apart from creating a robust source of wealth creation for its investors, a mutual fund SIP wrestles with the market fluctuations and results in appreciated returns.

SIP investment ensures a regular, disciplined, and consistent source of savings that aids in meeting the financial goals of the investor. The discipline which is considered an essential ingredient for any saving habit is an inherent feature of a Systematic Investment Plan. The benefit of staying invested with SIP works best when the investor stays invested through the ups and downs of the market and encashes the downswing of the market to accumulate more units.

The uninterrupted, and long term SIP instalments come with various benefits for the investor.

Let us take the example of two friends to understand the difference between the investment pattern of both the investors and how SIP investment leads to wealth creation in the long run by staying invested consistently.

Kumar and Gaurav start a monthly SIP of Rs 10,000 in an Equity fund in January 2000. Over a period of 4 years, both friends continue their SIP investment and accumulate 7256 units.

In the year 2004, the market witnesses a downfall, and the NAV of the fund start dropping from a high of Rs 75.10 in January 2004 to Rs 60.02 in April 2004, Rs 45.75 in June 2004 and Rs 43.25 in July 2004 following a dip of 42.5% in the NAV value.

The fall in NAV leads to different actions from both friends. While Kumar continues to stay invested and accumulate more units Gaurav stops his SIP to avoid market volatility. Kumar benefits by accumulating a greater number of units by staying invested and Gaurav stays away from the investment during this period.

By the year 2005 Kumar had accumulated 26540 units and Gaurav was holding the same number of units (10280) as before.

When the market started improving (NAV at Rs 56.85) in Septemeber 2005, Gaurav resumed his investment in SIP and started adding units. By the end of 2007, Kumar had accumulated 34540 units (having grabbed the opportunity of staying invested during the market downswing and buying more units at lower NAV) Gaurav had 12560 units ( having missed the opportunity to add more units during market downswing).

In  September 2008 the market again followed a downward swing( since the market follows trade cycles that include both highs and lows) and NAV fell from Rs 70.56 in September 2008 to Rs 35.98 in March 2009 showing a 49% dip in NAV. Fearing a loss of funds Gaurav again stopped his SIP investment and lost another opportunity of gaining more units. Kumar, understanding the market cycle and benefit of market downswings, continues to stay invested and accumulating higher units.

By the end of 2008, Kumar had accumulated 38470 units while Gaurav had 13600 units. The market starts growing by January 2010 and Gaurav again resumes his SIP. By the end of 2010, Kumar had accumulated 40550 units while Gaurav had  14900 units.

The value of Kumar’s consistent invested funds was Rs 1.8 crores while for Gaurav the value of his investment portfolio was Rs 70 lakhs showing the vast difference in the wealth created by staying a consistent investor.

 

KumarYearUnitsGauravYearUnits
Started from 2000 and stayed invested till 200420047256Gaurav20047256
  Market downswing-NAV falls200526540Market Downswing-NAV Falls -Stops SIP200510280
Accumulated higher units at lower NAV with continuous SIP200734540Resumes SIP as the market improves200712560
Sip continues consistently200838470Again Stops SIP as Nav falls with market downswing200813600
Market started Improving201040550Resumes SIP201014900
Value of PortfolioRs 1.8 CroresValue of the PortfolioRs 70Lakhs

 

It is thus recommended to stay invested in mutual funds SIP in the long run and not get perturbed by the market downswings. The market downswings is a part of the market cycle and are followed by recovery and boom. The recommended thing is, therefore, to stay consistent with SIP investment, and create wealth in the long run through by benefitting from the market upswings and downswings.

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