Joseph is looking at his funds’ returns and wondering if something is wrong. Some of the returns are in single digits and some are even negative. Fearful of losses, he wants to stop or redeem his SIPs. He meets his Financial Advisor to understand the situation and plan his future course of action.
Joseph: I started my equity mutual fund SIP two years ago and it was giving me good returns. But lately it has become marginally negative returns. Will I lose my money? What should I do?
Sankar: The market goes through ups and downs. It is this volatility that benefits the investors in the long run. When prices decline your SIP buys more units. Thus your average cost of purchase goes down. Later, when the market recovers, as it inevitably does, the value of your investment goes up giving you very good capital appreciation. The negative returns of the present will become positive returns in the future. Continue with your SIPs.
Joseph: How does volatility and time impact returns?
Sankar: Mutual fund investors are allotted units. Down trends in the market leads to lower average costs since you get more units for the same investment. When you remain invested for a long period, market recovery happens, pushing up the value of your investment. Down trends in the market are temporary. Sensex which was 100 in 1979 is presently above 36000. The journey has been very volatile. But the long-term trend is always up.
Joseph: Should I Stop my SIP In Mid- Cap and Small-Cap Funds?
Sankar: Mid and small-cap funds, which had a steller run in 2017, have not been doing well this year. As on 16th July the Nifty Mid-cap Index is down by around 15 percent and the Nifty Small-cap fund is down by around 23 percent YTD. This has impacted the performance of Mid and Small-cap funds. You should not stop SIPs. Continue to invest. Now many mid and small caps have become attractively valued. There will be recovery in this segnment.
Joseph: Is stopping an SIP now and then restarting SIP when the markets give us positive returns better than continuing with SIP now?
Sankar: Timing the market is almost impossible. You never know when the market will go down and when it will recover. Trying to time market corrections and market recoveries are exercises in futility. Continuing with the SIP is the best strategy.
Joseph: How long should I wait before I change the mutual fund scheme I invested in if the SIP returns are negative?
Sankar: If the market, particularly the segment that you have invested in, remains bearish for an extended period of time, the scheme also is likely to be impacted. If your fund/ scheme is under performing you can make an assessment and review your decision after a year.
Joseph: If I switch between funds, will it affect the power of compounding?
Sankar: If you remain invested in the right scheme in the right fund, you will benefit from the power of compounding. If a particular scheme in a particular fund is under performing compared to similar schemes in other funds for an extended period of time, you should review your investment and switch. This is similar to cutting losses in equity investments. But temporary under performance should not be a trigger for switch. To benefit from the power of compounding you have to continue investment and remain invested for long.
Joseph: Is SIP in ELSS schemes a good idea?
Sankar: SIP in ELSS is indeed a good idea. Vast majority of investors in ELSS schemes rush in to make investment during February or March for getting the benefit of 80 C exemption. If the markets are ruling high during these months, investors will not get the benefit of Rupee Cost Averaging. If you opt for SIP in ELSS you benefit from market volatility. Since ELSS has a lock-in of 3-years SIPs will be beneficial.
Always remember some basic principles. It is very difficult, almost impossible, to time the market. More important than ‘timing the market’ is the t’ime spent by remaining invested’ in the market. SIPs can be started at any time. Don’t stop SIPs during market crashes. Avoid bulk investments when valuations are high. Big money is made by remaining invested for a long period of time, particularly by investing through a bear phase.