When The Markets Crash, The Last Thing You Should Do Is Stop Your SIPs; Here’s Why

Yesterday, some of the worst fears of many investors came true. The BSE Sensex ended 4,390 points down while the Nifty plunged 5.93 per cent, the largest single-day fall in four years, as the NDA faced a tough fight from the INDIA bloc when the election results were announced yesterday.

The fact that markets move up and down is a known fact, but investors tend to behave irrationally during such times and more often than not, that leads to unwise decisions.

During such times, investors may reduce or stop their SIPs thinking that they will face a loss. However, that is a bad decision.

“Investing is more about managing emotions than about growth arithmetic. During the 100 days before the election results investors should have managed greed, and over the next 100 days investors must manage fear,” says Himanshu Pandya, founder, HP Private Wealth Advisory Services.

In fact, the concept of SIPs is that when the markets are up, it buys you fewer units and when the markets are down it buys you more units, or in other words it helps in ‘rupee cost averaging’. “SIP's are designed for long term forced savings with equity growth and it serves the maximum benefits when bought during bad to flat market cycles that help accumulate higher numbers of the fund units while the benefits can be then reaped when the market cycle turns around,” says Vivek Banka, Co-Founder, Goalteller, a financial planning firm.

So it is simple. Disciplined investment is the key. “It is in these types of volatile markets that SIPs deliver the best returns. It is not possible to time the markets on a consistent basis, nor is it essential. Investing regularly in an equity fund for a long time in a disciplined manner is the answer,” says Nehal Mota, Co-Founder & CEO, Finnovate, a wealth management firm.

She lays down three strategies for investors during the bear market.

In India bear markets are nothing new. We have seen sharp bear sell-offs in 2000, 2008, 2011, 2013, 2018 and again in 2020. Most of these have been significant corrections of 20 per cent to 60 per cent.

Case in point, if you had started a SIP in the NIFTY Index Fund in January 2020, just ahead of the Covid-19 crash, your corpus would have grown 1.3 times and you would have earned a whopping 19.8 per centCAGR returns till date.

“The first way to minimise losses during such bear markets is to persist with your equity SIPs. If you compare current Sensex levels with previous major peaks of the last 25 years, it is much above any of these levels today. The bear sell-off gives you an opportunity to accumulate these equity funds at much lower NAVs so as to reduce your average cost,” says Mota.

The second method is to follow the traditional asset allocation approach. Here is how it works. Start with your medium term and long term goals and put a corpus value to each of these future goals. Create SIPs on debt funds for short to medium term goals and SIPs on equity funds for medium to long-term goals. “Ensure that the asset allocation matches your risk appetite. That becomes your base mix. Each time, your mix goes out of sync by a certain percentage, you revert back to the original mix. That ensures that you take profits automatically at higher levels and have liquidity for opportunities at lower levels,” says Mota.

Lastly, investors can seriously look at tactical allocation funds as a means of overcoming this challenge. Tactical allocation funds like Balanced Advantage Funds, Equity Savings Funds and multi-asset allocation funds spread across equity, debt, derivatives, and other assets. “This not only diversifies the portfolio, but the fund manager also tactically shifts between equity, debt and other assets based on well-set valuation-based rules,” says Mota.

So irrespective of how the markets behave, continue with your SIPs. It will definitely be good for you in the long run.

Anagh Pal

BW Reporters