Why you shouldn't stop your mutual fund SIPs when the market falls

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Volatility is inherent to equities. It is practically impossible to predict how markets will behave on a certain day.
NEW DELHI: If you are a mutual fund investor, the current market movement must be giving you jitters. The Sensex yesterday opened 900 points lower and the Nifty went below 10,200. The Indian equity market opened in line with other Asian markets which tanked more than 5 per cent on Thursday, tracking the overnight fall in US stocks.

This is not a freak fall. Almost every other day the Indian stock market has been taking a beating. Caught in a storm of weak macroeconomic numbers, the IL&FS crisis and fear of more defaults, and global cues, the benchmark indices have lost more than 13 percent from their all-time high levels in August.
Understandably, investors are getting jittery. In today's 900-point plunge, Rs 4 lakh crore of investor wealth was wiped out in a matter of five minutes. Questions many mutual fund investors seem to be asking are: "Should I stop my systematic investment plans?" and "Should I continue investing?"

It’s a dilemma small investors face every time the markets tumble. Unfortunately, they usually end up making the wrong choice. Some stop their systematic investment plans (SIPs) in equity funds while others redeem their investments to avoid further losses.

So, what should a mutual fund investor do now?

Don't time the market
Volatility is inherent to equities. It is practically impossible to predict how markets will behave on a certain day. When markets tumble, investors stop their SIPs or redeem their funds. According to A. Balasubramanian, CEO of Aditya Birla Sun Life AMC, this is not something you should do. "The world is unpredictable now, and we are going to see a lot of uncertainty, complexity, ambiguity and volatility. In such times, investors should stay calm and steer clear of the noise and volatility. One should look at the long term instead, he said while speaking at the ET Wealth Investment Workshop in Bengaluru last month. He advised the attendees that they should continue with their SIPs in mutual funds and forget the noise. "The easiest way to gain maturity is through systematic investment, i.e., SIPs," he said.

In the latest ET Wealth edition, the cover story back-tested to see whether mutual fund investors should try to time the market by getting out before it crashes. ( Read the full story here: https://goo.gl/7TPQVQ) An investor who started SIPs in a diversified equity fund five years ago and continued investing irrespective of market movements would have earned a return of 10.5%. But an investor who managed to avoid the 10 biggest falls in the Sensex by getting out a day before the crash would have earned 13.8% returns.

But what if the SIP returns for the last one year are negative?
A dip in the markets is not reason enough for investors to stop their SIPs. It gives them a chance to add higher number of units after a fall. If they stay invested for the long term, the equity markets will go through a number of ups and down, and in some of these times, they are bound to see negative returns. In the long term, equity market returns follow nominal GDP growth rates. Hence, investors should continue their SIPs irrespective of the ones giving negative returns.

What should you do if scheme returns have turned negative?
One year is too short a period to take a call on equities, and definitely not enough to judge a scheme and the returns it has given in an SIP. Ideally, you should give the scheme three to five years to perform. However, if the scheme happens to underperform its benchmark even over a three-year period, then you can take a closer look at it and move to another scheme which has a better performance. Alternatively, if the mandate of the scheme has changed, or the fund manager has changed, you can discuss this with an advisor or any such professional before arriving at a decision.

Financial planners suggest investors link their SIPs to goals and continue till the goals are reached.

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What happens when you time the market
In same ET Wealth cover story, data was back-tested to see how much an SIP investor would have made by avoiding the 10 biggest falls in the Sensex since October 2013.

1. Regular investor: Kept investing through SIPs irrespective of market movements
Easiest strategy to follow: Requires no effort on the part of the investor. He just needs to keep investing in a disciplined manner.
Corpus value: Rs 3.96 Lakh
Returns: 10.51%

2. Perfect timer: Exited a day before all 10 crashes and reinvested entire amount on the next SIP date.
Needs to be lucky all the time: Must have clairvoyance to predict market movements and courage to reinvest entire sum on next SIP date.
Corpus value: Rs 4.33 Lakh (minus Rs 5,945 tax on short-term capital gains).
Returns: 13.77%

3. Cautious timer: Exited a day before all 10 crashes but reinvested after skipping next month’s SIP.
Most people likely to follow this strategy: Must have the same clairvoyance as the perfect timer, as also the stomach to reinvest after a gap of a month.
Corpus value: Rs 3.96 Lakh (plus Rs 4,151 short-term capital loss which can be adjusted against other gains).
Returns: 10.54%

4. Bullish timer: Invested more on all 10 crashes by advancing the next month’s SIP.
Sounds good on paper but difficult to follow: Must be able to invest on a day when everything is falling apart. Even this courage will not yield big returns.
Corpus value: Rs 3.97 Lakh
Returns: 10.63%

(All investors started SIPs of Rs 5,000 in a diversified equity fund (HDFC Equity) in October 2013. All SIPs assumed to be made on the first trading day of every month. Returns calculated on the basis of IRR. Data as on October 4, 2018.)
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