Systematic Investment Plans (SIPs) are considered an efficient way to invest in the market. However, one should never assume that SIP is arisk-free formula for making money or long-term SIP will always give good returns.
The investment philosophy is that when the market corrects or goes into recession, we will remain invested or better still we will invest more. Remember the philosophy of buying at low and selling at high? However, it is easier said than done. We think we will remain invested or invest more when market falls, but will we actually do it when the time comes?
Never time the market
What we have seen is that people’s tolerance for market falls when market falls. When investors see their portfolio eroding and hearing that market has more room to correct, they will try to get rid of stocks thinking they will buy when its available cheap but we can never time the market and usually end up chasing higher those stocks than what they have sold for previously in panic. We are not saying this is what all do but we have seen many individuals lose their rationale during recession or market correction.
SIPs not risk-free
Systematic Investment Plans (SIPs) are considered an efficient way to invest in the market. However, one should never assume that SIP is arisk-free formula for making money or long-term SIP will always give good returns. For example, investors who started investing before January 2007 when stock market was roaring would have seen their investment crash by almost 30% in eight months. How many investors would have stayed after seeing crash of 30% in span of eight months? Even investors with SIP would have seen their investment gone down by 24%. But investors with low risk tolerance or afraid of investing would have at best held their investment and would not have dared to invest more after seeing their portfolio eroded by 30% while SIP investors may have kept on investing through SIP route. In fact, SIP is not in math but in psychology. Investors would have second thoughts of investing when market is in downturn or volatile. On the other hand SIPs instill an investing discipline because the amount gets invested on the due date without fail.
Equity is not bank FD
Investors with very low risk tolerance shouldn’t be in equity markets as we have seen investors stopping SIP when returns turn negative. All investors want to buy at cheap prices and sell at huge profits but irony is that IDFC Mutual Fund found that only 1% of inflows were experienced when the market was cheaply priced at a PE of less than 16. When the PE was between 16 and 19 (indicating moderate valuation), about 19% of inflows came in. The remaining 80% flowed in when the market was expensively priced at a PE of over 19. So investors with low risk tolerance and afraid to invest during volatile and corrective market should stick to SIP. But mind you, equity is not bank fixed deposits where returns are guaranteed but SIP takes away our emotional decision making process and we are less susceptible to irrational panic behaviour during turbulent times.
The writer is director & COO, Tradebulls Securities