But it was all theory – now, let’s run some numbers and see how your investment would fare.

The two possibilities

We are considering two cases:

1. You stop your SIP now, when the equity market is undergoing a correction. Then, when the market recovers, you sell your units.

2. You keep the principle of long term investment and cost averaging in mind, and continue to invest in your SIP. Again, at a later stage when the market recovers, you sell your units.

Let’s see what the outcome of both these would be.

Example

Let’s say you started to invest in a mutual fund (MF) scheme in July 2007. At that time, you did your research, and found that “HDFC Tax Saver Fund” would be the best option for you.

You also decided that you would invest in the Growth option, and not the dividend option.

(Confused whether to choose growth or dividend option in an MF? Please read “Mutual Funds - Growth or Dividend option?”)

You invest Rs. 3,000 per month in this MF scheme through the SIP.

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The price data

Since we are considering the price movements from the past and the future, we need to make some assumptions.

The price data from the past – July 2007 till October 2008 – is the actual price of the HDFC Tax Saver Fund – Growth Option units.

The price data from November 2008 onwards is hypothetical – here’s the assumption:

The stock market crashes some more during end 2008, and remains low for the whole of 2009. It starts picking up from early 2010, and reaches the level seen in May – June 2008 during September 2010.

In my opinion, this represents a valid scenario considering the current situation of the markets the world over.

The analysis

1. Stop SIP now, sell units when market recovers

You started in July 2007, and invested Rs. 3,000 per month till Oct 2008. Thus, you invested for 16 months, and you total investment is Rs. 48,000.

Over the months, you have acquired a total of 307.03 units.

In Oct 2008, the Net Asset Value (NAV) of each unit is Rs. 117, and the value of your units is Rs. 35,922.

You wait for the markets to correct, and sell in Sep 2010. At that time, the NAV of each unit is Rs. 149, and the value of your units is Rs. 45,747.

You make a loss of Rs. 2,253, or -4.69%, on your investment.

That is, even when the NAV of the units goes up by 27% (from Rs. 117 in Oct 2008 to Rs. 149 in Sep 2010), you are not able to fully recover your money.

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2. Continue SIP, sell units when market recovers

You started in July 2007, and have invested Rs. 3,000 per month till Oct 2008. You continue making this investment till Sep 2010. Thus, you invest for 39 months, and your total investment would be Rs. 1,17,000.

Over all these months, you acquire a total of 916.78 units.

You sell in Sep 2010. At that time, the NAV of each unit is Rs. 149, and the value of your units is Rs. 1,36,600.

You make a profit of Rs. 19,600, or 16.75%, on your investment.

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Quick Comparison

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Conclusion

The results are quite apparent – it pays to keep investing in an SIP, irrespective of the market conditions.

And that’s the basic philosophy behind an SIP investment: In times when the prices are subdued, you get to buy more units with the same amount of money, thus lowering your overall per-unit cost!

More on SIPs and cost averaging:

• Cost Averaging
• Systematic Investment Plan (SIP) - A rupee a day, keeps worries away
• More on Systematic Investment Plan (SIP) and Micro SIP
• Do you have an SIP? Don’t stop it!

Bottomline: Don’t get panicked by the downturn in the stock market, and keep investing in the SIP of a well managed MF scheme. You would thank yourself later!

Happy investing!

Other articles you might be interested in:

• An Introduction to Fundamental Analysis
• An introduction to Post Office Monthly Income Scheme (PO MIS)
• Why you should have a contingency / emergency fund
• Auto Sweep Facility: Smart way to make your money work harder
• Equity Investment is Risk Free – Here's the Proof
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• Only paid out arrears to be subject to TDS for government employees
• An introduction to Technical Analysis
• Retirement money: How to invest, where to invest
• Do you have an SIP? Don’t stop it!
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