The market’s way down but SIPs are still a safe, long-term bet

So you missed the opportunity to enter the market when the Sensex fell to an intra-day low of 7697.39 on October 27. By November 10 the index had rebounded to 10,536 points.

Well, the fact is that even the best fund managers can’t time the market. Hence, mutual funds have long propagated regular investments through a systematic investment plan (SIP). What’s more, despite investors getting rattled by the equity market’s recent volatility, the fact is that falling markets can actually be an opportune time to do SIPs.

An SIP basically entails investing a regular sum into a mutual fund every month. Now, if the markets fall, your monthly investment would actually fetch more units, thus enabling you to reduce your average cost per unit. Rupee cost averaging — or averaging your cost of investment — is, after all, the principle on which the SIP rests.

For example, if a scheme’s net asset value (NAV) is Rs 10. Now, if an investor invests Rs 6,000 in one shot, he would get 600 units. Suppose another investor invests the same amount in a monthly SIP of Rs 1,000 for six months.

Now suppose, the NAV is Rs 10 in month one (resulting in 100 units), and it then moves to Rs 11 in month two (90.91 units), Rs 9 in month three (111.11 units), Rs 8 in months four and five (125 units each), and Rs 11 in month six. At the end of six months, then, the second investor would get 642.93 units.

Says Kartik Jhaveri, director, Transcend Consulting: “It’s a good time to do an SIP now because you’ll get more units at a lower cost.”

The SIP also relies on the power of compounding. That is, the longer you invest, the higher the returns are likely to be.

Consider this: if you’d invested Rs 1,000 a month in ICICI Prudential Dynamic Plan for five years from November 28, 2003 until October 31, 2008, your Rs 60,000 investment (Rs 12,000 a year for five years) would have become Rs 78,403.63 as on October 31, 2008, earning a return of 10.96 per cent.

An SIP done from the same scheme’s inception date of October 31, 2002 till October 31, 2008, would have resulted in a compounded annual return of 19.36 per cent.

The Sensex was just under 3000 points on October 31, 2002 but had jumped to just over 5000 points by November 3, 2003. So investments in that additional year when the Sensex was lower has resulted in a substantial difference in the five-year SIP and SIP-since-inception returns.

From November 2003, the Sensex continued its climb till it touched an all-time intra-day high of 21,206 on January 10, 2008, after which it has lost over 10,000 points. Again, the erosion has been sharper in October. For instance, a five-year SIP ended October 31, 2008 in the ICICI Prudential Dynamic Plan would have given a return of 10.96 per cent. The same five-year SIP ended a month earlier on September 30, 2008 would have given a return of 23.13 per cent.

The point is, investors cannot time the market. Hence, the SIP is the best option, and especially so in a falling market.