Fresh lump-sum investments
If you are planning on investing in a fund or starting another SIP, you will need to take a nuanced approach, suggest financial planners. For instance, if you are looking to invest a large sum, then a diversified equity fund may not be the right choice. The risk-reward is not favourable for making lump sum investments in a 100% equity product at this stage. “Any lump-sum now may be best deployed in an equity savings fund, where the money is invested across stocks, bonds and arbitrage in a manner that reduces the risk and makes it tax-efficient,” says Neeraj Chauhan, CEO, Financial Mall. These funds will deliver higher returns than pure debt funds, but will be less volatile than pure equity funds, as they invest in debt and arbitrage instruments. For a slightly long time horizon of say, 4-5 years, a dynamic equity fund would be a better alternative to a traditional equity scheme, Chauhan adds. Here, the fund manager will dynamically switch the equity exposure, investing more when the markets are cheap and less when they are expensive.
Looking to start an SIP?
Some investors might also be contemplating starting a fresh SIP in an equity fund. This approach may still work if the time horizon and the choice of the fund is right. Money invested via SIP, at current market levels, is likely to fetch modest returns over the medium term. A longer holding period may be required to squeeze out healthy returns. Apart from stretching the time horizon, Chauhan suggests that investors initiating an SIP may opt for a multi-cap fund, rather than a large or mid-cap scheme. A multi-cap fund retains the flexibility to decide the optimum mix across market capitalisations depending on the relative attractiveness of each basket. This puts it in a better position to build a portfolio, taking into account the current market environment. Apart from this, if investors have some surplus, they should put the money in a liquid fund, which can then be deployed at the right time, says Vidya Bala, Head, Mutual Fund Research, FundsIndia. “In case of any correction in the market, just investing via an SIP will not effectively capture the depth of the correction. Shifting money from a liquid fund in an equity fund in 3-4 instalments will help in making the most of the correction.”
Stop SIPs? Or continue investing?
The difference in the average return for regular SIPs and those undertaken when valuations were not too high, is less than 1%.
Investors are not likely to gain much by discontinuing SIPs when the market valuations are high.
Regular SIP investors
If you have been investing regularly via SIPs, you would have earned a healthy return. But should you continue with your monthly SIP commitments in the current market climate? Or, would you be better off taking a break till valuations become reasonable? Analysis suggests that investors would not benefit much by tinkering with their SIPs. Starting April 2002, the average 10-year monthly rolling return from an SIP in the average diversified equity fund stands at 14.7%, if you continued investing throughout the 10-year period, irrespective of the market situation. What if you had chosen to stop your SIP commitments whenever the market valuations got stretched? If you avoided the outflow when the Nifty PE crossed 22, then the average rolling return from the SIP would be 15.5%—only 0.8% more than if you had stuck to the SIP throughout.
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The other cost of stopping SIPs
Staying away from the market and not deploying the money may come at another cost: the lesser the money you have working for you, the lesser would be the final corpus generated from the SIP. Over the past 10 years, a regular monthly investment of Rs 5,000—total investment of Rs 6 lakh—would have helped you amass a corpus of Rs 12.23 lakh. On the contrary, stopping the SIP midway, owing to stretched valuations, would have yielded a kitty of Rs 9.25 lakh. Another issue is what to do with the money that is not used for the SIPs. In most cases, the amount would either remain idle in the savings account or be spent on household or lifestyle needs. Clearly, you would be in a better position to reach the target amount for your goals, if you remain committed to the regular savings habit. “The whole purpose behind taking the SIP route is to maintain the investing discipline. This gets defeated when you play around with it,” says Chauhan.
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Besides, the problem with a start-stop approach is that it is difficult to execute. Not many individuals would have the time to monitor the investment so closely. Even for those who do, very few would ensure they re-initiate the SIP when the market valuations become comfortable. Behavioural biases usually creep in, preventing many from getting back to regular investing. Instead of seizing the opportunity when the market falls, investors would find themselves paralysed, say experts. Similarly, rebalancing the portfolio—the need of the hour for many fund investors now—can be difficult. One alternative would be to opt for a trigger-based facility offered by mutual funds. Setting a trigger automates the process of booking gains in a rising market— when your fund makes a pre-determined level of gain, the trigger gets activated. However, investors would have to ensure the money so redeemed is invested in a safer avenue—an income accrual bond fund, for instance.