SIP Investment: Should You Invest When the Stock Market is Down?

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SIP Investment: Should You Invest When the Stock Market is Down? | WealthDesk

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Investors are well aware of the daily ups and downs in financial markets. How you react and act when your fund goes red, on the other hand, reveals a lot about you as an investor. It’s important to understand that equity markets are notoriously volatile. Understanding what makes the markets unpredictable, as well as why they are falling, may hold the key to reducing your anxiety.

The question to examine is whether your fund’s performance reflects a fundamental shift that would warrant you terminating your SIP in the stock market or redeeming your contributions. What if there is a case of negative market mood, such as the current situation of rupee depreciation, crude oil price hikes, and possible pandemic-related developments, among other things?

When your SIP in stock market investments enters a bear market, it is always a stressful and emotional time; it is psychologically challenging to accept. We can only do our best to examine what we usually do during market downturns.

SIP Investment – How Does it Work?

Let’s look at how a SIP in the stock market works with the help of an illustration. Assume you earn Rs 40,000 per month and set aside 10% of that for your monthly SIP mutual fund investment.

In June 2005, you started investing Rs 4,000 per month in the XYZ fund. Every month, you invest Rs 4,000 in the XYZ fund as part of this investment. One of the most significant benefits of SIP is the compounding power it provides.

The Rs 4,000 that you invest in SIP grows into a sizable corpus over time. You would have invested Rs 4,000 in the XYZ fund 120 times between June 2005 and June 2015. The total investment today would be Rs 4.8 lakh (120*Rs 4,000).

If you compute the return on this investment at 12%, it would have risen to ~Rs 9.2 lakhs, nearly twice as much as your initial investment. Even if you adjust this for a 6% projected inflation rate, your wealth will grow to ~Rs 6.6 lakh in this time, representing a 50% increase in the principal invested.

How to Deal with SIP Investments if the Market is Volatile?

It is natural for investors to get worried about their SIP investments when the market is volatile. The most common reaction to such a situation is to stop or withdraw your SIP investment.  The crucial thing to keep in mind here is your goal. If your long term goal is to build wealth, short term market volatility should not bother you. 

Let’s consider an example to understand this better. Your initial investment in January in SIP was Rs 1000. It stayed the same till March. Now, in April, the value dipped to Rs 750. In this situation, your stock value is lesser than your investment. You are at loss. There are practically two things that you would consider doing; one is to sell off the stock and second is to hold it a little longer and let the SIP bring down your average buying price. Now consider the SIP value remained at Rs 750 for 2 months and in July, the value shot to Rs 2000. 

That is a 100%+ return on your investment. Now recall, if you had sold off your holding, would you make such profits? No. It should be understood that investments are subjected to market risks. Getting rid of them is not always the solution if you are looking at long term returns. It would help to compare equities investments to investments in physical assets like gold to understand the ramifications of stopping your SIP in the stock market or investing when the market is down.

When the stock market falls

You will lose Rs 5,000 if you sell gold at Rs 30,000 per 10 grams that you purchased for Rs 35,000 per 10 grams. However, if you wait until gold prices rise to Rs 40,000, you can sell it for a profit of Rs 5,000.

Furthermore, instead of selling gold at Rs 30,000 per 10 gram, you may get Rs 15,000 by purchasing another 10 gram and then selling the 20-gram gold for Rs 40,000 per 10 gram.

Taking cues from the above example, if the price of equities declines, you should invest more rather than redeem your shares because redemption in a low market will turn a nominal loss into an actual loss. In the same way, you shouldn’t stop your SIP when the market is down.

Because SIP invests the same amount at regular intervals, you will receive more units when the fund’s NAV is lower at a low market. Because a fund’s worth determines the product of its NAV and the number of units it holds (i.e., NAV x No. of units), the more units you have, the higher the fund’s value will be when the NAV rises in a rising market.

Invest when the market is down to maximise returns

To maximize the return on your equity mutual fund investments, you should never stop your SIP investment at a low market and, if possible, make an additional investment to purchase more units in order to take advantage of lower average pricing.

The volatility of the funds you have invested in can be difficult to bear. SIPs appear to end, and redemptions occur to rise during volatile times, both exceptionally prematurely. According to behavioral scientists, investors are more affected by losses than by more significant profits.

When the markets are in a bear market, people tend to halt SIP investment or redeem the invested amount to avoid further losses. If you’re a long-term investor, though, volatility is your friend.

Let us use the following example of two investors who invested in the same SIP in the stock market.

  • Investor A began a monthly SIP of Rs 5,000 in the stock market Nifty Index on January 1, 2003, and has continued the same. His investment value/corpus will be around 41 lakhs on, say, October 8, 2018, whereas he invested only Rs 9.50 lakhs during this period.
  • On the other hand, Investor B began his SIP on January 1, 2003, but halted it during the financial crisis of 2008. His investment value/corpus will be about Rs 21 lakhs as of our sample date (October 8, 2018), while the money he invested was Rs 3.45 lakhs.

When we compare the two scenarios, we can reasonably assume that Investor A has generated an additional profit of roughly 20 lakhs by investing a few more lakhs in the dropping market while continuing SIP investment until today.

When the stock market falls, buying extra stocks could be a hidden gain. Yes, you read that correctly. When the stock market is down, opportunistic investors know it’s better to acquire supplies or invest in funds at a lower price (bear market) and sell or redeem them when the market is up.

Stick to your asset allocation and take advantage of the market’s dip as an opportunity to invest. Please keep in mind that this bear market isn’t going to last forever; what you’ll need is a well-diversified investment strategy.

Conclusion

During a stock market fall, you should avoid getting rid of your SIP investment. While market downturns can be frightening, take a deep breath and remember that they will pass. In the long run, this could be the most crucial aspect of your whole investment strategy. You could invest in professionally managed portfolios called WealthBaskets through WealthDesk, and benefit from lump sum and/or SIP investments. An investor should invest when the stock market is down to reap maximum benefit.

FAQs

Should I invest when the stock market is down?

When market circumstances get volatile, you may want to discontinue or redeem your SIP investment. The benefits of SIP, on the other hand, will only be available if you regularly invest, independent of market conditions.

Should I continue investing in mutual funds when the market is down?

Instead of focusing on market timing, investors should be disciplined and continue to invest in equity mutual funds regardless of market volatility. These short-term changes owing to market volatility have little impact on your SIP investment in the long run.

How could one take advantage of the stock market fall?

Short positions can be taken in numerous methods to profit from a falling market, including short selling, purchasing shares of an inverse ETF, or purchasing speculative put options, all of which will gain value as the demand decreases.

Does SIP have risk when the stock market falls?

Market risks are present when investing in mutual funds through a SIP. The risk with SIPs, on the other hand, can be managed and decreased by the fund managers and fund houses.