SIP

True benefit of SIP will follow by investing at low levels


‘No one can time the market’. It is time spent in the market, which is important than the timing.

The last 2-3 weeks in the stock market has been a nightmare. In a severe correction, the Sensex has fallen from around 12700 levels to about 9300 in a matter of few trading sessions.

It is true that the market valuations had become stretched and a correction was both desirable and long overdue. The problem, however, has been ‘the extent of fall’ and ‘the speed of fall’. The loss to the investors, therefore, has been unimaginable.

This has shaken the confidence of the investors. Given the secular bull run over the last 2-3 years; the booming Indian Economy; excellent growth in jobs & salaries; systemic improvements at BSE/NSE; etc. had encouraged many small investors to look at equity as an asset class to build long term wealth.

Mutual Funds, offering benefits such as diversification, professional management, and convenience, had emerged as an alternative route for small investors to invest in equity vis-à-vis taking a direct exposure. Systematic Investment Planning was one strategy which was being actively encouraged by the mutual funds.

With the carnage continuing at the stock markets and no bottom in sight, does it make sense to continue investing in equity today? Should one continue with the SIPs one had committed to? Can one begin fresh SIPs now? Or should one sell and just get out of this manic market?

There is a need to objectively assess the situation. Panic reaction will not help. In fact a part of the problem was our greed which made us jump into the market at a time when the valuations were stretched. And so were our expectations – we were looking to double the money in a matter of months, if not days.

Broadly speaking, we need to try and understand
a. Is the market investment worthy?
b. If so, is this the right time to invest?

Is the market investment worthy?
We all know that in the long run stock markets are ultimately a reflection of the performance of the companies listed on the exchange. In short term there could be many factors such as liquidity, Govt. changes, monsoon, global factors, etc. which could make the markets volatile. But if the long term fundamentals of the economy are intact, the markets will finally achieve the levels which are line with the economic growth.

As things stand today, the fundamentals of Indian economy still remain strong. India is still predominantly a closed economy, with its’ own demand dynamics. The young demographic profile looks promising. A lot of fresh investment is happening in all the three sectors of economy viz. agriculture, services & manufacturing, not to mention the infrastructure. There is as yet nothing to suggest that the GDP growth of 6.5-8% will not be consistently achieved over the next 2-3 years.

Of course, there are concerns on the oil prices, the interest rates, infrastructure bottlenecks, strength of the dollar, performance of global economies etc., which could affect growth in India too.

But looking at the pros and the cons, the balance still seems to be in the favour of decent and consistent growth.

Is it the right time to invest?
How do we make money in the market? Simple, by Buying Low and Selling High. But do we really do so? No, we don’t. Our emotions are much stronger than our reason. So generally we will buy when the markets are rising and sell when the markets are falling.

The second important lesson we need to learn from the long history of the stock market is that ‘No one can time the market’. It is TIME spent in the market, which is important than the TIMING.

And the purpose of SIP is precisely that. It does away with our fruitlessly trying to predict the tops and the bottoms. And it removes emotions from our buying decisions. We buy more units when the markets are down and less units when the markets are high. So, we un-emotionally go on investing. And that is the secret of success of a long-term investor at the stock markets.

The markets will be volatile. That is the inherent nature of the market. It is the truth you can’t wish away. However, there is one more truth. Consistent, long term investing in equity has delivered superior returns. SIPs iron out the volatility risk, associated with one-time investing.

In fact, the true benefit of SIP will follow by investing when the markets are down. We will now get more units. Our average cost of acquisition will go down and as markets recover, our recovery would also be faster.

Though, of course, SIPs will not deliver profits if the long-term economic performance looks shaky and markets are consistently going down.

Therefore, the question whether SIPs make sense in falling market is inherently flawed. As long as one is confident of the economic growth going forward, SIP makes sense in any market – falling, rising or steady. Also, we need to be realistic about our expectations. No grand delusions of doubling money in a jiffy. The author is an investment advisor and can be reached at ramesh007hero@yahoo.co.in