Feeling down after seeing your SIP value plummet to all-time lows?
Well! You are not alone.
Markets have been volatile for a while now since the pandemic struck and has had its effects on businesses and the economy. Side effects of the tumultuous market are falling NAVs in your SIP investments. But, we all know how SIP’s work, these investments strive solely to benefit from Rupee cost averaging.
Consider this, for a monthly SIP investment of Rs.10,000 at a fund NAV of 10 you accrue 1000 units. In the consecutive month, the markets fall by 20%, your NAV is down to 8. So, in your next SIP instalment, you accrue 1,250 units, benefitting you by 25%. These NAV’s come into play delivering better returns once markets bounce back to normal.
Yes, it is tough to stay composed when markets are slipping to new lows, creating emotional stress enough to make one consider pulling out right away. But, by putting a pause on your SIP instalments in a falling market scenario, you are working in the opposite direction of your gain.
Keep on going
Pulling back now would mean missing out on the best opportunity to make most of your long-term investments.
So, why crashes make SIP s very happy & why SIPs must not be stopped, if not enhanced?
While in the interim the values of your NAV’s might be a disheartening sight the purpose of investing via the SIP route is solely for the long haul. Returns of every SIP Instalment (in one fund) done in crisis – From Peak of 2008-2012 (each of the 60 instalments has earned positive returns, if held till 3rd April 2020).
SIP’s with higher exposure to equities are unlikely to gain linear returns right away but nevertheless will prove to be rewarding in the long-run.
If you are considering pulling out from SIP’s to invest in safer traditional instruments like FD’s, PPF, or even gold or silver, take this data of the past 32 years into consideration. Historical data proves that Sensex provides a substantially higher return in terms of CAGR when compared to gains from traditional instruments. BSE Sensex yields returns of around 14.08% while traditional instruments CAGR yield an approximate 7-9%.
The above graph is proof of significant future gains that can be made from investing in falling markets. Investing during these pandemic stricken markets with a keen eye on the underlying assets, are assured to be beneficial in the long-run.
Holding Back
SIP’s should not be stopped unless one has a compelling reason to do so. Taking into account job losses and financial crises, having an adequate emergency fund to sail you through these rough times is a top priority. In case of severe cash flow problems, it may be advisable to pause a SIP and build liquidity. Nevertheless, return to routine investing once you overcome the cash crunch, in order to avoid affecting your long-term goals. Additionally, looks for ways to restoring lost contributions, which could be done through staggered lump-sum investments to ensure you do not turn your notional losses into real ones.
