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Photo: iStock

Opinion | SIPs are the perfect way to invest in the present tough market condition

Don’t allow the current environment to sabotage your long-term investment

The Indian equity markets have had a terrible last month as they struggled to react to the developing spread of the covid-19 or novel coronavirus and the resultant global shutdown. Even after the sell-off there remains a high degree of uncertainty in terms of how the scenario may unfold as this is a true black swan event and there are no real guides available as reference points to the markets.

But from a markets perspective, the important thing to note is that regardless of the path that the virus takes, ultimately it is more of a one-off disruption that the economy will come out of. So, when we take a long-term view—say three to five years—we don’t expect any lasting damage to the economy or the markets.

But how should existing investors—especially systematic investment plan (SIP) investors who have been regularly allocating to the markets and likely find themselves deep in losses—approach this environment? It’s only fair that such a sudden change in fortune combined with negative media headlines cause people to question their investment decisions. However, we suggest that any sudden or knee-jerk reaction at this time should be avoided. Instead investors should take a step back to see how things may play out going forward and take a call accordingly. One way to do that is to turn to market history.

How have SIP allocations behaved in previous crisis? We studied the Indian equity markets for the last 20 years—2000 to 2020—to see how SIP investors have fared in normal environments and how that experience changes after a sharp market sell-off. To keep things simple, we have assumed investments into the Nifty 50 index. We computed daily rolling returns of three, five and seven years of monthly SIPs over the 20-year period. Then we identified SIP returns for the same tenors immediately after a 25% fall in the markets. Here’s what we found.

ANALYSIS OF SIPs IN NIFTY 50 INDEX

Normal experience: The average rolling returns from SIPs with tenures of three, five and seven years have been 17.1%, 14.9% and 12.8%, respectively. While the average returns have been in the 13-17% range, there has been uncertainty around the averages due to sharp ups and downs in the market. The minimum return in some cases was negative. However, interestingly as the SIP tenures get longer, the losses become lesser. For the seven-year tenure, even the minimum returns are positive.

After a sell-off of 25%: For the tenures of three, five and seven years, the average returns were 23.7%, 23.6% and 16.2%, respectively. After each 25% fall in the index, we see that investors who start SIPs from these levels see dramatically better average returns compared to the investors in the scenario above. And that improvement is sustained over very long periods as well. It is important to note that past performance may or may not be sustained in the future.

What Should Existing Investors Do?

While the above analysis is for new SIPs, existing investors can also benefit from these trends through three important steps:

Let the existing SIPs continue: Essentially, any incremental instalment from an existing SIP will work exactly similar to a new SIP and, hence, get the same benefits.

Do not redeem accumulated units: Market prices change daily. The only price that impacts investors is their entry and exit price. Focus on the long-term potential of the markets.

Consider topping up or creating new SIPs: If your cash flows permit, sell-offs provide a fantastic time to take advantage of lower market valuations.

Unfortunately, equity markets are volatile and there are a number of periods when we have seen market fall by 25% or more—that’s a quarter of its value lost in just a few months! At the same time, corrections have tended to be short and sharp and ultimately the markets have bounced back to the benefit of investors who did not panic and remained true to their investment objectives. A fall in the equity markets is nothing new (even if the reason for the fall has changed) and investors should not allow the current environment to sabotage their long-term investment journey. We are confident that the markets will normalize over the medium to long term.

SIPs provide the perfect way of investing in such tough market environment because even if the uncertainty lasts a few more months, the regular allocations can help investors average out their entry costs.

Jinesh Gopani is head of equity, Axis AMC

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