The current stock market level provides a good opportunity to accumulate more MF units for the same SIP amount and lower your average cost.
After a continuous slide in the stock prices in recent weeks, even the long-term wealth of the equity mutual fund investors seems to vanish in thin air. The frontline indices such as the BSE Sensex and the Nifty 50 are down by around 30 per cent while some of the stocks are down by up to 70-80 per cent. For a long-term investor, the equity MF NAVs have also come down considerably. What is noteworthy is that even the SIP investors, who had started investing 10 years back, are about to enter the negative territory or may already have started getting negative returns by now.
FE Online in an email interview with Arun Kumar, Head of Research at FundsIndia.com, attempted to find answers to some of the common queries of equity MF investors and understand what should the investors do now.
Here are some remarkable insights for the SIP investors to take note of. Read on:
Is it a bad idea to stop SIP and re-invest when the markets settle down once the impact of Coronavirus on the economy has better clarity?
Sharp declines are usually followed by sharp recoveries and continuing your SIP ensures you are positioned to take full advantage of this. It is a combination of the down and upside periods, that allows SIPs to be a successful strategy over the long run.
By continuing with your SIPs in such times, you can bring down the average cost of your overall investment (a mix of units bought at higher NAV in the past and units bought at a lower NAV now) thereby improving your long-term returns.
What should new investors who had started investing over the last 3-5 years do now?
Historically, when we analyzed monthly SIP data from 1995 for Nifty 500 TRI, 17 per cent of the times a 5-year SIP had provided returns below 5 per cent. In those instances extending the SIP time frame by 1-3 years, lead to a significant recovery in SIP returns upwards of 11 per cent CAGR. The average returns were 15 per cent and 17 per cent CAGR when extended to 7th and 8th year.
Inevitably markets have always recovered from market corrections, and the current market provides a good opportunity to accumulate more mutual fund units for the same SIP amount and lower your average cost. Whenever the recovery happens, there is a significant performance improvement seen in your SIP returns.
Is it the right time to put in a lump sum now? What caution needs to be exercised by equity MF investors?
The valuations as measured across different parameters such as MCAP/GDP, PE, PB, Earnings Yield to 10Y Gsec all point towards attractive valuations. While it is difficult to quantify the near-term earnings growth impact, it is reasonable to assume an above-average earnings growth environment for the next 5 years. This assumption is driven by a low base, corporate tax cuts and recovery in corporate bank earnings.
For investors who don’t need the money for the next 5-7 years, this can be a good time to increase equity exposure in your portfolio.
While the potential future return environment from these levels are attractive, lump-sum investors need to manage for regret. They have to balance between – the regret of missing out if markets rally from here vs regret of entering too early if markets correct further. This can be done via Staggered rule-based approach to deploying additional money. It is advisable to keep a written plan on when to invest, what percentage of a lump sum or debt portion to invest and where to invest.