Amogh Sir Notes # 1

Stick to SIPs in a falling market to maximise gains
Fear has made investors cautious; greed now looks out of sight as India’s equity market is down for more
than a year. In addition, the volatile market has made investors puzzled about the future direction. There
is no doubt that long term mutual fund investments are still giving better returns whereas investors who
entered at higher levels are feeling uneasy looking at the market volatility. Here, if an investor is thinking
to stop their systematic investment plan commonly known as SIP, he must reconsider his decision. He
could be losing on two fronts: First, if market goes up he loses the opportunity to convert his negative
returns into positive. Secondly, if market drops further, he loses the opportunity of higher units. In a falling
market scenario, most investors lose their patience or become anxious about their eroding portfolio value.
Also some negative news in the Indian or global market forces certain proportion of investors to cancel
their SIPs.
This type of behavior is a potential source of damage and goes against the systematic way of investment to
create wealth. To make the financial planning more difficult, most investors restart SIP when market
moves up. In this case, investor losses its best investing period and finds it difficult to accumulate needed
corpus to achieve their financial goals. Investing in bad times could be a boon when market goes up.
Trend Analysis
To give a better understanding of SIP, we at ICRA Online took different time periods (scenario) of SENSEX
over the last two decades to show that systematic investment in bad period actually benefits the investor.
We have also compared with lump sum investment to highlight who is better-off in a particular scenario.
The study shows that the best period to reap maximum benefit through SIP is a downside market or range
bound market. In a V-shaped recovery (from Feb-2000 to Jan-2004 and Jan-2008 to Nov-2011) where
market initially falls and then recovers, SIP investment help to gain from this movement. In a range bound
market (from June-1994 to Sept-1999) also it gives a better result as it benefits from both the up-anddown
cycle trend. Hence, it would not ne prudent if the SIP is stopped in a falling market. We can also
understand that both these scenario is the most difficult ones to follow and requires patience to earn
higher returns in the equity market. This is where disciplined investment comes similar to what investors
do in case of life insurance and other fixed or risk-free debt investments. However, in case of bull market
(Feb-2003 to Jan-2008) or when bull-run is followed by a correction (Jan-1991 to March-1993 and Feb-
2003 to Oct-2008) SIP scores lower than lump sum investment. But practically timing the market is difficult
for many investors. Investor should also note here that as SIP is done on a continuous basis, the real
returns calculated will be higher than absolute returns shown in the table. So, in some cases, like from Sep-
2009 to Nov-2011, lump sum returns are better than SIP but actually it could be the opposite

Now as the longest bull-run (5 years) is the story of the past, it is likely that the investor may see a range
bound market for some time or slow/crawling upward market. SIP method is better off in this scenario as
it gives the advantage of cost-averaging. In the difficult economic scenario we could see some bad quarters
but then interest rates will start going down, and markets will revive as the Indian growth story is still
intact.
From financial planning perspective also it is better to think about financial goals rather than short term
unrealized losses. In an investment cycle, investors will see both bright and gloomy days. So, it is important
to continue your investment to get maximum benefit in the longer run. However, it is difficult to track
every asset class individually and beat the market in all instances. Hence, it is important to have a financial
planner in place who will guide the investor in every step of their life to achieve their financial goals.
Reproduced from www.mutualfundsindia.com