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Nivesh Jaagran With the markets turning volatile, does it make sense to continue your SIP?

With the markets turning volatile, does it make sense to continue your SIP?

Let us analyse SIP performance in different market scenarios.
Shreeta Rege Oct 12, 2018

The last few months have been a mixed bag for equities. While overall SIP flows continued to remain positive, it would not be very surprising for investors to suffer from momentary jitters after looking at the topsy-turvy markets. They may wonder if it makes sense to continue their SIP investments.

To clear the confusion, let us try to understand how SIPs perform in different scenarios.

We know that SIPs offers the benefit of rupee cost averaging. As the SIP amount remains constant, you accumulate more units when markets correct and less units in a rising market. In times when markets toggle between highs and lows, investing a small amount regularly allows you to gain from the market dips. To understand this better, let us look at an investor’s portfolio in three different scenarios – withdraw entire amount, pause the SIP and continue SIP in volatile markets. Here we assume that the market goes through a few corrections before bouncing back again.

Withdraws his SIP

Date

NAV

SIP Amount

Units

01-07-2017

11.2

-1000

89.29

01-08-2017

11.4

-1000

87.72

01-09-2017

11.5

-1000

86.96

01-10-2017

12

-1000

83.33

01-11-2017

12.2

-1000

81.97

01-12-2017

12.4

-1000

80.65

01-01-2018

11.8

-1000

84.75

01-02-2018

11.9

-1000

84.03

01-03-2018

11.6

-1000

86.21

01-04-2018

11.7

-1000

85.47

01-05-2018

11.6

-1000

86.21

01-06-2018

11.4

10676.9037

936.57

Total Return

 

-6%

 
 

Pauses his SIP

Date

NAV

SIP Amount

Units

01-07-2017

11.2

-1000

89.29

01-08-2017

11.4

-1000

87.72

01-09-2017

11.5

-1000

86.96

01-10-2017

12

-1000

83.33

01-11-2017

12.2

-1000

81.97

01-12-2017

12.4

-1000

80.65

01-01-2018

11.8

-1000

84.75

01-02-2018

11.9

-1000

84.03

01-03-2018

11.6

-1000

86.21

01-04-2018

11.7

-1000

85.47

01-05-2018

11.6

-1000

86.21

01-06-2018

11.4

0

0.00

01-07-2018

11.3

0

0.00

01-08-2018

11.5

0

0.00

01-09-2018

11.9

0

0.00

01-10-2018

12.5

11707.1312

936.57

Total Return

 

7.74%

 

Continues the SIP

Date

NAV

SIP Amount

Units

01-07-2017

11.2

-1000

89.29

01-08-2017

11.4

-1000

87.72

01-09-2017

11.5

-1000

86.96

01-10-2017

12

-1000

83.33

01-11-2017

12.2

-1000

81.97

01-12-2017

12.4

-1000

80.65

01-01-2018

11.8

-1000

84.75

01-02-2018

11.9

-1000

84.03

01-03-2018

11.6

-1000

86.21

01-04-2018

11.7

-1000

85.47

01-05-2018

11.6

-1000

86.21

01-06-2018

11.4

-1000

87.72

01-07-2018

11.3

-1000

88.50

01-08-2018

11.5

-1000

86.96

01-09-2018

11.9

-1000

84.03

01-10-2018

12.5

16047.1938

1283.78

Total Return

 

10.54%

 
 

As you can see, a panic sell when markets correct, causes the investor to redeem at a loss. On the other hand continuing the SIP allows the investor a chance to accumulate more units at a lower cost. When they redeem these units, after market recovers from the short-term correction allows them to redeem at a higher cost. 

While SIP helps your investors even out the volatility, market fluctuations are testimony to the fact that equity investments can be a bit unpredictable in the short-term. Hence, your investors having a long-term investment horizon should consider pure equity products. For short-term needs, recommend hybrid investment options as they are less volatile than equity.

To summarise, invest for your clients’ long-term goals through SIP. Advise them not to panic in case of short-term corrections; instead tell them to use the corrections as an opportunity to gain more units. This will boost their portfolio returns when markets turn.

 

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