Existing investors in equity mutual funds have a reason to rejoice with the equity market scaling new highs. On the contrary, if you are a new investor looking to start your mutual fund journey or if you want to make fresh investments towards your financial goals, then you have probably asked, ‘Is it the right time to start SIP?’

Investors often assume that if they invest during market highs, they will earn significantly lower returns because further growth may be limited.

As you may be aware, the S&P BSE Sensex has crossed the 56,000 mark, and it is yet to show any signs of slowing down. It has more than doubled since the market crash of 2020 on the back of liquidity support and a low-interest-rate environment.

So, does it make sense to start SIP during market highs?

The answer is Yes!

Remember, there is no ‘bad time’ to start investing via SIP if your goals are more than 5 years away. Waiting for the right time to start investing could hamper your financial goals.

Let’s assume that you started a monthly SIP of Rs 10,000 in HDFC Top 100 Fund, one of the oldest and popular large-cap mutual funds, in January 2000. Since 2000, the large-cap index S&P BSE Sensex has scaled multiple peaks. The index closed above the 10,000 mark for the first time in 2006, above 20,000 in 2007, above 30,000 in 2017, above 40,000 in 2019, and breached the 50,000 mark in 2021.

Data from ACE MF shows that by investing a sum of Rs 10,000 regularly via SIP (total investment of Rs 26 lakh) you would have accumulated a corpus of Rs 2.7 crore as on August 26, 2021. Even after investing at all-time highs, your SIP would have grown at an extended internal rate of return (XIRR) of 18.5%.

The above example illustrates how investing even during market highs can offer you meaningful returns. Any time is a good time to start investing as long as you invest regularly regardless of the market conditions. The equity market witnesses various events throughout the year. Most of these events do not have any long-term impact on the indices. Therefore, the equity market can always deliver positive returns in the long run.

Timing the market can be counter-productive to your goals because it is difficult to predict the market movement. You can never really tell if the market has reached its peak or if the market crash has bottomed out.

Investing via SIP makes timing the market irrelevant and you can focus on ‘time in the market’. When you invest in SIP, you accumulate more mutual fund units when prices are low so when the market bounces back, it results in higher returns. Similarly, you buy fewer mutual units when prices are high. This enables you to lower your average investment cost over a period.

Fundamentally, investing in equity mutual fund is about patience and following a disciplined approach. SIP lets you do just that.

Graph: Growth of S&P BSE 500 in the past calendar years

*YTD as on August 26, 2021
(Source: ACE MF, PersonalFN Research) 

Equity mutual fund investments and market volatility go hand in hand. Economic activities and consumption demand are yet to show full recovery amid the COVID-19 crisis. This indicates that the stock prices have run ahead of the fundamental and valuations across market caps are flying high. Consequently, a correction may be imminent. However, no one can predict when it will happen or what the extent of the correction will be.

In such a situation, investing a lump sum amount can be risky. Investing through SIP will help you mitigate the market risk by staggering your investment/s over a period.

Overall, the long term outlook on the equity market is positive. As and when the economy recovers, it will drive the equity markets higher. The pace of growth may be higher in some years and lower, or even negative in others. But over a period of time your wealth gets compounded and investment cost averages out when you invest via SIP, taking you closer to achieving your financial goals. Even if a negative trigger spooks investors, leading to sell-off in the market, you can be assured of recovery sooner or later.

Now that you have learned the importance of investing via SIP, it is important to note the following points to get the best out of your investment:

1) Select worthy schemes

Different mutual fund schemes have different investment styles, strategies, objectives, risk profile, etc. It is important to select schemes that align with your financial goals, risk profile, and investment objective. Once you have assessed your needs, select the best mutual fund scheme by evaluating various risk-reward parameters. Do not give undue importance to the fund’s past performers because it is not an indicator of future returns.

It is equally important to lay emphasis on qualitative parameters while shortlisting schemes. This includes determining the efficiency of the mutual fund house’ systems and processes as well as the fund management team, and portfolio characteristics.

Click here to know how you should select top equity funds for your portfolio.

2) Invest the right amount

Though you may have selected a worthy scheme, you could still fall short of reaching your goal, if you do not invest an adequate amount. The amount that you need to invest regularly will depend on your desired corpus as well as the investment horizon to goal. It is important to set realistic return expectation for the purpose of calculating the SIP amount. Additionally, you will need to adjust the investment amount for inflation.

You can use PersonalFN’s SIP calculator to calculate the value of your monthly SIP by simply entering a few details — the monthly SIP amount, the SIP tenure, and the compounded rate of return you expect from the mutual fund scheme in which you intend to invest.

Ensure that you step-up your SIP contribution in line with the rise in your income which will help you accumulate a bigger corpus and beat inflation.

3) Ignore the market noise

Extreme market conditions often make investors question their investment decision. You may be tempted to stop or redeem your SIP investment whenever the market conditions turn volatile. However, the benefits of SIP will be only available if you invest regularly regardless of market conditions.

Discontinuing SIP when the market is at an all-time high or all-time low goes against the principle of disciplined investing. If you stop SIP or miss instalments, you might lose the advantage of compounding and thereby miss your investment target. Therefore, it is important to stick with your investment till your goal is achieved.

To conclude

One must remember that equity investments take time to grow. In case of SIP investments, each instalment must be given adequate time to grow and generate meaningful returns. When you are nearing your goal horizon, gradually reduce your equity exposure to invest in a more stable and less risky investment avenue, such as debt mutual funds and Bank deposits.

Ms Radhika Gupta, MD and CEO of Edelweiss Mutual Fund rightly stated, “When markets are at all-time highs, do not let your caution hit an all-time low. Invest sensibly, safely, and wisely. And remember, no opportunity is running away!”

This article first appeared on PersonalFN here