New Year 2019 investment resolution: Use SIPs to turn Rs 2000 into Rs 3 cr

It’s 2019 excitement time! Many of us are busy planning on how to celebrate December 31. This day generally has high level excitement amongst family and friends, as many plan an overseas trip, shop, burst firecrackers, etc. But, it is also the time when many of us would make a new year resolution. Hence, why not involve investment as your new year plan for 2019. Why? Because, everyone loves to gain hefty sum on their hard earned money. To make it easier, all you would need is Rs 2000 in your 2019 for becoming rich. 

There many investment options in India, which makes it important to understand which product suits your need the most. There is a saying with maximum investment comes with maximum returns, but not all can afford it. Thereby, a Rs 2000 per month SIP can be best option for lower-middle and middle class citizens. Guess what! You can even become crorepati by investing just Rs 2000 every month. 

Among many investment tools, one that stands out and is very popular is Systematic Investment Plan (SIP). As the name suggests, this scheme offers discipline, good returns and market related gains. Simply put, SIPs allow you to invest a fixed sum every month in your favourite mutual fund scheme. 

One can invest in SIP on various intervals like monthly, quarterly and yearly. Generally, monthly investment are best in SIPs, as it does not require heavy amount from an investor and also deducts money directly from your savings account. 

SIPs stand out with lowest lock in period and tax-saving options. With an SIP, one can also avail the benefit of equity linked saving schemes (ELSS) which has lowest 3-year lock in period and gives higher returns compared to traditional method of fixed deposits. 

Not only this, an SIP made in ELSS schemes also offers tax deduction under section 80C of Income Tax department in the EEE format which includes tax exemption, wealth accumulation and zero exit load. 

There are two methods which greatly help investors earn big through SIPs. 

Firstly is rupee-cost averaging. As we are aware that market is sentiment driven and unpredictable, this creates an issue on when is the best time for investment. With rupee-cost averaging, an investor with its invested SIP amount earns more units when the price is low and earns less units when the price is high. 

Second would be power of compounding. Every amount you invest, you earn interest on it. This interests get compounded and accumulated over a period of time. The higher the SIP tenure, the higher would be your return. 

How to invest in SIPs in 2019: 

Firstly, chalk down your monthly expenses, and as per your requirement decide how much you are capable to invest in SIPs. 

Secondly, ensure your purpose and specific goals when you want to make an investment in SIPs. For instance, you plan an SIP for buying a house in future, hence, accordingly you should decide how much is your investment requirement. 

Have proper KYC documents and bank account documents like voter identity, driving license, passport, ,debit card, passbook, PAN card and Aadhaar card. 

Before opening an SIP consult with advisors on your investment options. Diversify your portfolio between equity and debt mutual funds. 

Remember to keep the decided amount in your bank account every month, so that it can be used to investment in SIP. 

Have a knowledge of the mutual funds you have invested via SIPs. Track them on multiple occasions and do not blindly depend upon broking firms investment options make your own analysis. 

Well now that everything is said and done, let’s make a new year resolution. If you plan to investment from 2019, then a piece of SIP can be your resort. One can also retire a crorepati with SIPs. 

                                                                                                                       -ZEEBUINESS              

7 reasons to exit a mutual fund even if it is doing well

Underperformance by a mutual fund may not be the only reason to stop SIPs. Here’s why you should quit despite the fund performing well. 

1. You need to rebalance your portfolio

If you are rebalancing your portfolio, it may be reason enough to dump some funds and opt for others that are in sync with your goals. The triggers for rebalancing could be many. For instance, you may need to alter the risk profi le of your portfolio due to age, say, when you are approaching your 50s. In such a case, you would want to move from an equity-oriented to a debtheavy portfolio. Proximity to a financial goal could also mean that you move out of equity-oriented funds and opt for safer options like balanced or liquidity funds. 

2. Fund is not performing as well as its peers

It is possible that your fund is giving high returns, say 15% over a specified period, which may seem acceptable to you in isolation. “However, if you compare it with its peers and find that others are giving 18-20% and your fund is lagging far behind, you may want to move out of the fund and invest in a better performer. So a fund may be delivering high returns, but its performance should be seen relative to the category’s performance. If it does not match up, shift to a better fund. 

3. You have reached your financial goal

Ideally, one should align one’s investments in mutual funds with specifi c goals. So if you invest in an equity fund for 10 years for your child’s education, you will need to exit after this period as you will require the money. Have the discipline to quit even if the fund is doing exceedingly well. “Don’t get greedy for higher returns and continue the SIPs. “For instance, if you were supposed to exit in 2017, but did not do so due to the bull run, you would have suffered a loss when the markets fell in 2018,” he adds. You are jeopardising your goal by not exiting when you should. 

4. Fund objective has changed 

If the fund changes its objective regarding risk or return in a way that it is not aligned with your objective, you should quit even if the fund is performing well. For instance, if you had invested in a conservative hybrid fund, but it raises its equity holding, or a thematic fund starts including scrips not related to the prescribed theme, it is time to end your SIPs. Instead, opt for a fund that sticks to your portfolio’s risk and return profile making it safer to reach your goals 

5. Fund management team has changed

If a merger or acquisition of the fund leads to a change in the management team or the fund manager quits, you could consider bailing out under some conditions. If the fund’s investment policy or objectives change and are not in sync with your goals, or you are not comfortable with the new team and believe the performance may be impacted in the future, you could consider shifting to a different fund. You can also move if you are not happy with the new fund manager’s track record 

6. Fund overshoots median returns or benchmark

It is possible that the fund has performed well over several quarters, but significantly overshoots or falls below the median returns or benchmark during this period. In such a case, even though the fund is doing well, you should quit and go for a less risky option. “It may be a high beta fund with excessive volatility and the upside or downside swing may be huge. If you have aligned the fund to a particular goal, it may not be a good idea to retain the volatile fund in your portfolio taken in by the high returns. The risk associated with such funds may not be worth the promised returns. 

7. Changes in macroeconomic environment

If there are changes in the macro-economic policy by the government or the regulator, and the fund does not align with these or these are likely to impact it in the long run, it may be a good reason to move out. For instance, if a Budget announcement renders some funds less tax-friendly than others, you may want to shift even if the fund performance is good as it may impact your returns in the long run. “The recent downgrading of IL&FS securities meant that the funds were in a correction mode. In such cases, to safeguard your capital, you can exit and reinvest when the scenario changes Co-founder, 5nance. 

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Secret ingredient to create a large retirement fund is time, say mutual fund advisors

Do Indians start planning for retirement only in their 40s and 50s? Many financial planners and mutual fund advisors believe so. They say despite all the financial wisdom that is floating around these days it is still rare to come across a person in the initial years of his careers talking seriously about his or her retirement plans. Most people who approach these planners and advisors for help with their retirement plans are invariably in their 40s and 50s.

“Most investors come to us for retirement planning, mostly when they are in their 50s or some in their 40s. Planning your retirement becomes difficult with every passing year. I tell my clients that there are two things that you need in your portfolio from day one: emergency fund and retirement fund.

Why are these experts talking furiously about planning early for retirement?

“Firstly, the closer you are to your retirement; you will have to invest more in a smaller time horizon. Secondly, if you don’t have at least 7-10 years in hand, investing in equities becomes risky. Without equities multiplying your investment is very difficult. Thirdly, retirement is a very important financial goal. If you have an investment horizon of 20-25 years, it become very easy and mitigates the risk.

Let us work with an example. Ram started working at 22. He immediately started investing Rs 5,000 via a monthly SIP in a midcap mutual fund scheme. He chose the midcap mutual fund scheme because he was a high risk-taker and he had a really long investment horizon of 30 years. If Ram continues with his invest for the next 30 years and earns around 15 per cent returns on his investments, he would be able to create a retirement corpus of Rs 1.76 crore.

What if Ram starts investing for his retirement after 10 years when he is in his 30s? Assuming an annual return of 15 per cent, he would have managed to create a corpus of Rs 49 lakh at the end of 20 years.

What if he starts investing for his retirement when he is in his 40s? Assuming a similar annual return of 15 per cent, he would have managed to amass a nestegg of Rs 11.61 lakh at the end of 10 years.

As you can see if you have time in hand the power of compounding helps you to multiply your wealth many times. That is why some call it eighth wonder of the world.

Note, the above calculation is just to draw a comparison. Nobody should plan for retirement in this fashion. One has to first find out the target corpus. For more, read: How to calculate your retirement corpus? Then one has to put together an investment plan to achieve the goal.

Mutual fund advisors believe that investing for an extended period ensures higher returns. They believe that one should start planning for their retirement as soon as one starts earning. “Times creates wealth. Starting early would give you the benefit of compounding. We always encourage investors to start investing for retirement as soon as they start investing for their other financial goals.

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In 2019, invest in a systematic manner and accumulate

You were cautious on the stock market earlier. What is your stance now?

We have shifted from being cautious to cautiously optimistic. But we are still not in a thumping the table bullish mode. 

The market mood has changed significantly in the last few months. What are the factors still forcing you to be cautiously optimistic?

I agreed that there is a significant change in the market mood. In September, we feared quite a few things, but most of those fears are gone. However, two major factors are still loaded against our market now. 

Is the upcoming elections the first one?

Historically election year in India is volatile. If you look at the last three general elections, all were very volatile years for the market. So we see 2019 as a year where investors should invest in a systematic manner and accumulate through products like SIPs and STPs as those models work better in volatile years. 

What is the second important factor?

Continued rate increase by the US Fed is the next big headwind. We are now in a phase where both the US and Europe have stopped printing money. With US rates going up, money will keep going to the US and consequently there may not be much allocations to emerging markets like India. That is why we are keeping our near-term outlook as neutral to mildly positive 

Your base case view is that US will keep on increasing rates?

Yes, and if that changes, you can turn clearly positive on Indian equities. If the US Fed states that rate hike is over in its next meeting, then emerging markets including India are likely to head towards a bull market. However, this situation is unlikely as per our assessment. Since the US economy is doing well, they need higher interest rates. 

High valuation was one reason for your earlier caution. Where is the market placed in terms of valuations?

Our valuation-based caution and keeping higher cash component helped us to buy during September-October when major indices corrected by around 15%. The broader market valuation too has corrected and is now close to its long-term average, so you can term it as moderate valuation. If the valuation was cheap, you could have a larger allocation to equities. Since it is moderate, it is better for investors to go for accumulation using SIPs and STPs in 2019. They can also invest through categories like balanced advantage and equity savings funds. 

What are your segmental views now?

Our earlier large-cap bias helped us because the recent correction was largely in mid- and small-caps. As a result, the worry about overvaluation in mid- and smallcaps has also come down. Across market cap segments, on an average, valuations remain slightly above average. Just like the large-cap space, we see opportunity in the mid- and small-cap spaces now as there are pockets that are cheap while some continue to remain expensive. In other words, we have shifted from a large-cap bias to a multicap bias now. 

If all segment valuations are not cheap, what kind of returns should one expect in 2019?

We are in a middle territory because the current valuation is slightly above its long term average. It means that the downside risk has abated, but the immediate upside potential is not very high in percentage terms either. So, an investor should invest in 2019 with near-term moderate return expectation but with a clear three-year view. Sizeable returns will be made only when the US interest rate cycle finally turns. 

What about the recent cut in crude oil prices? Will it not improve market outlook?

The fall in crude price is an extremely positive development for India as it will translate into a savings of roughly `2 lakh crore in our import bill. This will bring down inflation, reduce pressure on the currency and support financial stability. 

If crude prices coming down is good for the economy, why is the current situation not so positive?

When oil goes up significantly, oil exporting nations start investing in emerging markets like India. On the other hand, when oil prices slump these nations withdraw money from the markets like India by selling their stocks. 

Some PSU banks are still reporting losses. Will the corporate NPA issues drag further?

We are of the view the NPA cycle has bottomed out. We have more of corporate facing banks in our portfolios now. Regarding the losses, lot of it is because of NPA provisioning recognised earlier. The operating profits of corporate banks are steadily improving. 

What is your debt market outlook?

We have been positive on debt and continue to remain so. The returns of all the moderate duration funds are good. The yield differential between G-Sec and AAA is placed now at 90 bps for both three-year and five-year buckets and the gap is much more for AA and A papers. I think the debt risk is overblown in many of the sectors and the high risk spread prevalent now may come down in coming months. 

                                                                                                                                                                          -etwealth

Here's why you should choose SIP over lump sum when investing in ELSS

ELSS funds are an efficient instrument to save tax and build wealth at the same time. ELSS is an equity mutual fund which allocates most of your invested capital in stocks of companies across industries and sizes.

These funds come with a lock-in period of three years. It means you cannot redeem your fund units for three years from the date of allotment.

It is one of the investment avenues available under Section 80C of the Income Tax Act which qualifies for availing a tax exemption of up to Rs 1.5 lakh.

Lately, ELSS funds have gained popularity among the investors as an excellent wealth accumulation tool. Apart from having the shortest lock-in period, ELSS funds deliver the highest returns owing to a large exposure to equity component in the fund portfolio.

One question that lingers in mind of investors is that which is a better way to invest in ELSS funds: Systematic Investment Plan (SIP) or one-time investment. The final decision is based on your personal goals and factors discussed in the following text.

How is SIP different than one-time investment?

SIP and one-time investment (also known as lump sum) are two modes available to an individual to invest money in mutual funds. In both the cases, the person is allotted mutual fund units at the prevailing Net Asset Value (NAV).

The major difference lies in the manner of the cash flows. In case of one-time investing, you invest a big chunk of money all at once to buy units of your preferred mutual fund.

In case of SIP, you may prefer to invest in a staggered manner instead of putting all your money at once. It involves a fixed amount being debited from your savings account at regular intervals and used for the purchase of mutual fund units of the indicated scheme.

An investor who does not have lump sum in hand right now but has a regular stream of income, say by way of salary, may invest via SIP mode. Conversely, if there is a person whose future cash flows are not guaranteed, then opting for SIP seems impractical.

Why SIP is better than one-time investment for ELSS?

Basically, you need to be guided by your personal goals and risk appetite for investing in ELSS funds. It is up to you whether to choose SIP or one-time investment. However, SIP seems an ideal mode of investment on account of several reasons:

Spreading out the risk

ELSS being an equity-oriented fund, opting for one-time investment is like taking a risky bet in one go. You end up investing a huge chunk of money without being aware of the market conditions. Just in case you catch the market when it is at the peak, then such kind of approach can prove to be detrimental.

Instead, go for a planned and staggered approach by way of SIP. In this option, your investments are spread throughout the financial year. In this way, you lower the risk of entering the market at an unfavourable moment.

Rupee cost averaging

As money is invested at regular intervals you can take the advantage of market fluctuations. When the NAV is at low levels, you buy more units of the ELSS fund. Conversely, when prices are high, relatively lesser units will be bought at prevailing NAV.

By investing at regular intervals, you can avoid the complex decision to time the market. Ultimately, per unit cost of your units is averaged which reduces the overall cost of investment.

Financial discipline

By opting for SIP, you get into the mode of disciplined investing. You inculcate the habit of investing small sums at regular intervals. In this way, your investments become an integral part of your tax planning.

Instead of postponing investing till the last moment, you are able to invest in a planned manner throughout the year. It also helps to have a long-term approach towards equities which increases the probability of earning higher returns.

The Bottomline

While investing in ELSS, consider wealth creation as an equally important objective as tax-saving. Have a long investment horizon of at least five to seven years.

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Why equity investment is must during retirement to avoid poverty in old age

Earlier this year, I received a message from a senior citizen who said his returns from a fixed deposit had fallen by 25%. While it sounded surprising, it was true. It was the difference in what he received from a five-year deposit that he had made in August 2012 and on its renewal upon maturity in August 2017. 

To those who just read headlines on interest rates, this doesn’t make sense. Depending on what you are measuring and how you are comparing, interest rates have gone down by 2 or 3%. But here’s what he said: ‘I was being paid Rs 35,352 every month—subject to income tax— enabling me to lead a worry-free life. Now on maturity I have reinvested the amount in the same bank and I will be paid Rs 26,489.” 

The interest rate on his fixed deposit may have gone done by just about 2.5% , however, his income is down by 25%. In fact, this is essentially an obfuscation in the way the reduction of interest rates is covered in the media. A reduction in the interest rate on a particular kind of deposit, say from 10 to 8%, is a reduction of 20%. If you were earning Rs 20,000 a month, you will now earn Rs 16,000 a month. 

Seniors have retired from the economy 

The entire move towards lower interest rates, while great news for the economy, is of little relevance to older, retired people. Lower inflation and interest rates, better fiscal management and higher economic growth will carry no benefit for them because they are no longer in the earning and accumulative phase of their lives. An older person is not going to get a better job, or a higher salary because the economy is growing. That phase of his or her life is over. 

However, wishing for higher interest rates is not a solution. This yearning for higher rates is there because for years we have been conditioned to ignore high inflation, which is the evil twin of high interest rates. I’m sorry to say this, but the person in the above example is financially doomed. During the course of the first five years of the FD, when he was getting Rs 35,352 as interest income and spending it, he was actually eating away his capital. Out of that income, no more than Rs 7,000 to 10,000 was real income. The rest was just the inflated value of the currency. 

Here’s the key fact that he and crores of others like him ignore: his real income has probably not gone down. If he was spending only his real, inflation-adjusted income, he would probably find that it had actually increased. So how would he have spent only his real income? The answer is, by spending only about 1.5 % of the deposit per year, and letting the rest compound and accumulate. This is based on the assumption that FD rates are about 1.5% higher than the inflation rate. 

Obviously, he would need far more money to do that. Instead of Rs 40 lakh as deposit, he would need more than Rs 2 crore as deposit, which he does not have. There is no complete solution to this particular problem. However, a partial solution lies in the returns that equity can generate. Real (inflation-adjusted) equity returns are actually double or triple that of fixed income. Where a FD can generate 1.5% above inflation, equity will give 3-5%. 

No way out but equity 

There is no way out except to take some exposure to equity in a measured, de-risked and tax-efficient way. The ideal method would be to follow these steps: First, keep a year’s expenses aside and gradually invest the remaining amount into a set of two or three hybrid funds. After that, you can start withdrawing from these funds an amount that is roughly 3-4% per annum of the total remaining sum. 

This will give you an amount that is equal to,or more than, what you are earning from a fixed income deposit today. The best part is that the value of the remaining investment will also grow at roughly the inflation rate. If you can implement this, then there is virtual certainty that you will not be face old-age poverty. Moreover, this approach will also be vastly more tax efficient. 

If one is to avoid old-age poverty, then this fear of equity in retirement must be gotten rid of. There’s no other way. 

                                                                                                                                                                        -etwealth

Is it better to invest in tax saving mutual funds through lump sum or SIP

Section 80C of the Income Tax Act 1961 allows tax payers to claim deductions of up to Rs 1.5 Lakhs in a financial year from their taxable income by investing in certain eligible schemes specified under the Section. Eligible schemes under Section 80C include Employee Provident Fund (EPF), Public Provident Fund (PPF), National Savings Certificates (NSC), Tax Saver Bank Fixed Deposits, Life Insurance Policies and Mutual Fund Equity Linked Savings Schemes (ELSS). Of the various 80C schemes, Mutual Fund ELSS schemes and Unit Linked Insurance Plans (ULIPs) are market linked, while others specify a rate of interest. 

ELSS or tax saving mutual fund is also one of the most tax friendly investment options. Capital gains of up to Rs 1 Lakhs in ELSS are tax exempt. Capital gains in excess of Rs 1 Lakh are taxed at 10%. ELSS has been gaining a lot of interest among investors based on the traffic statistics and queries in Advisorkhoj.com. One of the questions, which investors have with regards to ELSS is, whether they should invest in ELSS in lump sum (up to Rs 1.5 Lakhs per annum) or through monthly Systematic Investment Plan (SIP). 

Lump Sum versus SIP

There is a lot of online content on Lump Sum versus SIP debate. We also have a number of articles in our blog discussing this topic. Our take on this topic in general for mutual funds is that, the lump sum versus SIP debate is irrelevant because comparing lump sum and SIP is like comparing apples and oranges. You will invest in when you have lump sum funds available with you; on the other hand, you want to invest from your regular monthly savings, then you should invest through SIP. If you have lump sum funds available but you keep them lying in your bank account and invest through SIP for a long period of time, then in a rising market you will get lower returns because you will generally be purchasing units at higher and higher NAVs. The decision to invest in lump sum versus SIP therefore should be driven by your financial situation. Does this lump sum versus SIP decision logic extent to ELSS also? We will discuss this in the next section.

Lump Sum versus SIP investing in ELSS mutual funds

To certain extent, the argument made in the previous paragraph extends to ELSS mutual funds also; you can invest in lump sum only if you have funds available, otherwise SIP is the route for you. However, there is a nuance in the case of tax saving investments. ELSS investment in the strictest sense is not one-time because you need to invest every year to claim deductions from your taxable income and save taxes. Your tax saving in that sense is not strictly one time, but more in the nature of regular investments. Therefore, even you are investing in ELSS in lump sum, when if we look over period of time then your investment pattern is in the nature of an annual SIP. In this context, lump sum investment and monthly SIP in ELSS mutual funds can be compared.

As mentioned earlier, you can invest in lump sum only when you have sufficient funds available with you. For example, if you want to invest Rs 1 Lakh in ELSS, assuming you can claim Rs 50,000 deductions from other 80C sources like EPF, life insurance premiums etc, you need to have Rs 1 Lakh in your bank account.

Through SIP on the other hand, you can spread your Rs 1 Lakh annual investment over 12 monthly installments (approximately Rs 8,300 per month) and invest from your regular monthly savings. Is it better to wait till you have accumulated Rs 1 Lakh in your bank account to invest in ELSS mutual funds or invest through SIPs? We will do some scenario analysis to examine this.

Different investors have different savings and expense patterns. Therefore, we will examine three scenarios of lump sum investments made every year, over a period of 5 years. The period of this analysis will be April 1, 2013 to March 31, 2018.

• Rs 1 Lakh invested in lump sum in ELSS on April 1 of every financial year (April 1 – March 31)


• Rs 1 Lakh invested in lump sum in ELSS on March 1 of every financial year


• The above two scenarios are two extremes, one where you are investing at the beginning of the financial year and the other, where you are investment almost towards the fag end of the financial year. So we will also analyze a third scenario, where you invest Rs 1 Lakh in the lump sum somewhere in the middle of the financial, on October 1. This is also the time, when many Indian companies pay Diwali Bonus to their employees.

In all the above 3 scenarios, you will be saving the same amount of tax. We will compare all the three scenarios with a fourth scenario, which is investing Rs 8,300 per month through SIP. Equity Linked Savings Schemes are essentially diversified equity mutual fund schemes, which invest in equity and equity related securities, across different sectors and market cap segments. Different ELSS funds may have different market cap biases; for purposes of this analysis, we will take the market benchmark Nifty 50 as the proxy for ELSS. Let us examine the different scenarios.

Investing in lump sum in ELSS Mutual Funds on April 1, every financial year

In this scenario we are assuming that you have sufficient funds available in your bank account to invest in ELSS tax savings funds at the beginning of the financial year. This scenario may or may not be applicable to you, depending on your financial situation, March 31, 2018 you would have made cumulative tax savings investments of Rs 5 Lakhs, saving around Rs 1.5 Lakhs in taxes over the last 5 years (if you are in the highest tax bracket). The total value of your ELSS investment will be Rs 7.2 Lakhs.

Investing in lump sum in ELSS mutual funds on March 1, every financial year

This is the other extreme scenario but not a very uncommon one. Many tax payers, even if they have investible funds available delay their tax savings to the last 1 or 2 months of the financial year, and scramble to make their tax savings investments towards the end of the financial year.March 31, 2018 you would have made cumulative tax savings investments of Rs 5 Lakhs, The total value of your ELSS investment will be Rs 6.5 Lakhs.

Investing in lump sum in ELSS mutual funds on October 1, every financial year

Let us examine in the intermediate scenario, where you make your tax savings investments on October 1 of every year.March 31, 2018 you would have made cumulative tax savings investments of Rs 5 Lakhs, The total value of your ELSS investment will be Rs 6.75 Lakhs. You can see that, in this scenario your returns are higher than in the second scenario, but lower than first scenario.

Investing through monthly SIP in ELSS mutual funds

Let us now see, how much you would have accumulated if you invested through SIP (Rs 8,400 every month) March 31, 2018 you would have made cumulative tax savings investments of Rs 5.04 Lakhs, The total value of your ELSS investment will be Rs 6.8 Lakhs.

Summary and our take

Our take on this is that, if you expect to have sufficient funds available early in the financial year, it is best to make your tax saving investments early in the year. Your money will remain invested for a longer period of time and therefore, you will get higher returns. You should avoid delay your tax planning till the end of the year because this not only causes last minute hassles but also results in lower returns. We have seen many tax payers missing out on tax savings because they do not have sufficient tax savings funds at the end of the year.

In general, given that different investors have different financial situations, in our view monthly SIP is best method of making tax savings investments through ELSS. SIP not only keeps you disciplined in tax savings but saves you a lot of work. Once you initiate SIP in ELSS through one time ECS mandate, you can keep your tax planning on track for many years, without going through the hassle of making fresh investments every year. As seen in this blog post, you also get superior returns through SIPs.

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Why continue with mutual fund SIPs even when market crashes

Over the past month or so, we are experiencing a period of heightened volatility in the stock market, primarily driven by weak macroeconomics and IL&FS crises. The Nifty has corrected by more than 1,000 points from its last peak.In past, such volatile conditions would have seen large scale mutual fund redemptions and Systematic Investment Plan (SIP) cancellations. But even in current trying times, we witnessed record inflows via SIP mode in September 2018. This is a testimony of the growing maturity amongst Indian investorsHowever, if the market continues to remain volatile and decline further from the current levels, it may cause uncertainty and fear among less experienced investors.

Characteristics of deep corrections

Though we are technically not in a bear market, we will explain some of the characteristics of a bear market for the benefit of investors who have not yet experienced bear markets or very deep corrections. In such conditions, market continues to fall even after a big decline; the Sensex may fall by 1,000 points in a week and then fall again the following week. There may be the occasional pullback rallies which may give hope to investors, but in such rallies stocks are sold by traders and the market falls again. Two questions confront investors in such times:-

• Should I remain invested in stock (or equity mutual funds) or sell (redeem)?


• Should I continue to invest through SIP or stop it?

We will address both these questions in our subsequent sections.

Should you remain invested or redeem?

In big corrections, your mutual fund values may fall every other day or week; it may be tempting to stop the loss by redeeming your investment. However, you should remember that if you have a long investment tenor, correction only causes a notional loss to your investment and not a permanent one, as long as you remain invested. If you have a long investment horizon, you can wait for the market to recover and resume its long term secular growth trend.

In the last 20 years, the Nifty 100 has given 18% annualized total returns, despite at least 4 major (20%+) corrections in the interim. But if you redeem when the market has fallen, the notional loss becomes a permanent loss. If you have a sufficiently long investment horizon, it is unwise to sell or redeem your mutual fund investments after a crash.

Should you continue your SIP when market crashes?

Investors may be tempted to stop / cancel their mutual fund SIPs, when market crashes because the marked to market value of the SIP can keep falling for weeks or months even when you keep investing through SIP. But stopping SIPs when the market is falling defeats the very purpose of SIPs. SIPs work on the principle of Rupee Cost Averaging. By reducing your average cost of acquisition during corrections, SIPs enable you to earn higher returns in the long term. By stopping your SIPs in a falling market, you are depriving yourself of the opportunity to buy units at lower cost. The opportunity cost of SIP cancelation can be substantial in the long term.

Let us explain this further, with the help of an example.

Example

Let us assume you started your monthly SIP of Rs 10,000 in Nifty 10 years back. Let us examine two scenarios. In the first scenario, you stopped your SIP every time Nifty declined 10% from its previous high, redeemed all your units and parked your redemption proceeds in a fixed deposit paying an interest rate of 8%. Then you waited the market to get back to its previous high to resume your SIP. When you resume your SIP, you also re-invested the redemption proceeds parked in FD along with the missed SIP instalments, which we assume were invested in a recurring deposit account (paying 8%) for the time the SIP was stopped. For sake of simplicity, let us ignore premature FD withdrawal charges and exit loads.

In the second scenario, you kept on investing through monthly SIP, irrespective of market levels. Let us now see how much corpus you would have accumulated. With a cumulative investment of Rs 12 Lakhs, you would have accumulated a corpus of Rs 19.7 Lakhs in the first scenario and a corpus of Rs 20.2 Lakhs in the second scenario (where you simply continued your SIP). For all the effort you put in scenario 1, you made less money than scenario 2, where you simply remained disciplined.

Conclusion

• The benefits of Rupee Cost Averaging over a long investment tenor covering several market cycles enables investors to benefit from volatility


• Power of compounding unlocks the real value of SIP mode of investment over a long investment horizon.


• SIP is the best way of investing in a disciplined manner for your long term financial goals. You should continue to invest irrespective of market levels till your financial goal is achieved. 

                                                                                                                                                                   

                                                                                                                                                              - advisorkhoj