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Why you should not stop your SIP when market corrects

You have been investing in a mutual fund (MF) scheme through a Systematic Investment Plan (SIP). Now that the share market has crashed, you are wondering if you should cancel this SIP. Should you?



In “Do you have an SIP? Don’t stop it!”, we saw that it doesn’t really make sense to terminate an SIP when the stock market is down.

We understood how the principle of cost averaging would work in times like these.

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.

(Download this spreadsheet that contains the full data and analysis. You need to be logged-in to download the spreadsheet. Please take advantage of the free registration that takes less than a minute. To know the benefits of registration, please click here.)

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.

(Download this spreadsheet that contains the full data and analysis. You need to be logged-in to download the spreadsheet. Please take advantage of the free registration that takes less than a minute. To know the benefits of registration, please click here.)

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.

(Download this spreadsheet that contains the full data and analysis. You need to be logged-in to download the spreadsheet. Please take advantage of the free registration that takes less than a minute. To know the benefits of registration, please click here.)


Quick Comparison










Stop SIP now, sell units when market recovers Continue SIP, sell units when market recovers
Investment per month Rs. 3,000 Rs. 3,000
Months 16 39
Total Investment Rs. 48,000 Rs. 1,17,000
No. of units bought 307.03 916.78
Average price per unit Rs. 156.34 Rs. 127.62
Value of units Rs. 45,747 Rs. 1,36,600
Profit / Loss Loss Rs. 2,253 Profit Rs. 19,600
Profit / Loss % -4.69% 16.75%

(Download this spreadsheet that contains the full data and analysis. You need to be logged-in to download the spreadsheet. Please take advantage of the free registration that takes less than a minute. To know the benefits of registration, please click here.)

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:

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!

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