India’s equity market investors have all the reasons to cheer, as the Sensex and Nifty indices have climbed to fresh all-time highs thanks to the sustained rally over the past three months. The S&P BSE Sensex hit a record high of 63,523 on Wednesday, June 21, 2023, while the Nifty 50 closed at 18,857, beating the previous peak of 18,812, which scaled on December 01, 2022.

Graph: YTD Growth of S&P BSE Sensex and Nifty 50 Indices

Data as of June 26, 2023
(Source: ACE MF) 

India continues to be one of the fastest-growing emerging economies and an attractive investment destination among peer market nations, as seen by the acceleration of its economic growth in the March quarter and the cooling of inflation. Indian equities have seen consistent foreign inflows, backed by the nation’s promising economic potential. According to a Reuters report, foreign investors have poured in 738.12 billion rupees ($8.99 billion) so far in this financial year. 2023 might be a successful year for Indian equities if the monsoons do not play spoilsport in response to the developing El Nino conditions that could result in drought and uneven rains that could drop agricultural production and inflate prices.

In India, mid and small cap segments are experiencing extensive activity, which is likely to continue. The S&P BSE Midcap and S&P BSE Smallcap indices, which measure smaller market capitalisation, each had a YTD increase of almost 12%. The FIIs come back to the Indian equity market, India’s robust GDP growth amongst peer nations, the government’s push for infrastructure and capex growth, production-linked incentives, strong corporate earnings, a well-capitalised banking sector, and RBI’s decision to pause the rate hike cycle are the main drivers of the market’s upward trend.

However, compared to most global peers trading at lower values, Indian equities appear to be relatively expensive in valuation. Nevertheless, this does not imply that markets would decline, as the Indian equity markets are not extremely expensive either, but the safety margin seems to have shrunk a little. Further, the possibility of global recession, a rise in inflation again, macroeconomic uncertainty and geopolitical tensions are some of the key risks. If these risks do materialise, Indian equities are unlikely to remain immune. Thus, it would be preferable to refrain from overly tilting the investing portfolio towards equities that swayed the market highs.

[Read: The Investment Strategy Mutual Fund Investors May Follow as Sensex, Nifty Touch Record Highs]

Why it makes sense to invest in mutual funds via SIPs at a market high

The positive market outlook observed in recent months has been extremely beneficial for equity mutual funds, and investors may naturally be considering their next course of action. Due to the fact that Systematic Investment Plans (SIPs) are the most popular investment option for mutual funds, some investors have a tendency to pause or redeem SIPs during market peaks and wait for the market to correct before re-entering at lower levels. Equity mutual fund investment, on the other hand, requires discipline and patience. The beauty of SIPs is that you don’t have to time the market to invest in them or panic-redeem them; instead, you just need to stay put and spend ‘time in the market.’

On the contrary, some investors are also sceptical about starting an SIP at a market high and they wait for the market to correct. Remember, there is no ‘right time’ to start investing via SIP towards your long-term goals, one should begin as early as possible. Your financial goals may be hampered if you hold off on investing until the market has corrected and prices are lower. SIPs, as you can see, provide the benefits of rupee cost averaging and the power of compounding; it is a passive strategy for long-term wealth creation that does not rely on market timing.

SIP investment allows you to buy fewer mutual fund units when prices are high and more mutual fund units when prices are low. As a result, rupee-cost averaging helps you to gradually reduce the average cost of your investments. When you maintain your investment and reinvest irregular cash flows into the SIP, the power of compounding works best. You can only do it if you sincerely pledge your long-term commitment to the SIP. The compounding advantage is lost if you stop the SIP in the middle, and the SIP won’t be able to provide the necessary target returns.

Let us look at an example of how SIPs work even when you invest at a market high:

Since 2000, the S&P BSE Sensex India’s most tracked bellwether index has scaled multiple peaks. The index closed above the 10,000 mark in 2006, climbed above 30,000 for the first time in May 2017, above 50,000 in February 2021, and breached the 60,000 mark in the same year in September 2021. Post that, to date, the index has never gone below the 50,000 mark.

For instance, Mr A started a monthly SIP of Rs 10,000 in a suitable equity-oriented mutual fund scheme in June 2010. Now, considering that Mr A invested a sum of Rs 10,000 regularly via SIP (total investment of Rs 15.6 lacs), he would have accumulated a corpus of around Rs 32 lacs as of June 2023 at an expected rate of return of 10% p.a. This shows that even after starting your SIP or continuing to invest in current SIPs while the market is at all-time high, your SIP could grow and provide you with substantial returns over the long run. No need to redeem at market peaks; as long as you invest consistently, regardless of market conditions, any time is a good time to start investing.

Table: Performance of Equity Mutual Funds (Investment via SIP)

Category SIP Returns (in XIRR%)
6 months 1 year 3 years 5 years 7 years 10 years
Large Cap funds 24.86 19.91 16.77 15.73 21.62 24.70
Large & Mid Cap funds 32.48 23.12 18.80 16.10 22.41 26.65
Mid Cap funds 43.96 34.45 22.36 15.07 20.98 26.75
Small Cap funds 53.18 34.96 24.80 15.32 11.05 12.43
Flexi Cap funds 31.56 22.87 20.76 17.50 23.59 26.99
Multi Cap funds 37.81 32.98 20.33 16.04 18.71 26.73
Value funds 30.68 30.51 25.04 19.59 19.39 24.37
Contra funds 29.63 23.15 22.70 17.27 30.09 36.13
ELSS funds 29.57 24.99 19.78 15.27 21.24 24.82

*Past performance is not an indicator of future returns
Data as of June 26, 2023
(Source: ACE MF) 

Investing via SIP makes timing the market irrelevant; the equity market witnesses various events throughout the year that have no long-term impact on the indices. As a result, the equity market is known to deliver positive returns in the long run while it overcomes short-term volatility. Due to the difficulty of predicting market movement, timing the market may work against your goals. It’s difficult to determine whether a market has peaked or reached its lowest point.

Having said that, investing a lumpsum amount in mutual funds at a market high may be risky. Investing through SIP will help you mitigate the market risk by spreading out your contributions across time. With SIPs over a period of time, your wealth gets compounded, and investment cost averages out, bringing you one step closer to reaching your financial goals.

However, keep in mind that there are a number of barriers present which could derail the equities market. As a result, it is crucial to approach equity mutual funds prudently. Sharp market corrections may result if economic growth does not continue as anticipated.

[SIP Calculator]

How investors should approach SIP investments at market highs

  • Choose worthy mutual fund schemesAvoid chasing the top-performing mutual fund schemes or category based on recent performance. While investing via SIPs, it is crucial to select worthy schemes based on investor’s suitability. Different mutual fund schemes have different investment styles, strategies, objectives, risk profiles, etc. It is important to select schemes that align with your financial goals, risk profile, and investment objective. Also, evaluate various qualitative, quantitative and risk-reward parameters and do not give undue importance to the fund’s past performers because it is not an indicator of future returns. To reduce risk, investors may consider maintaining a well-diversified portfolio of mutual funds across market caps and asset classes.
  • Avoid the market noiseInvestors frequently second-guess their investing choices in the face of extraordinary market situations, whether they be bullish or unfavourable. The herd mentality could get you to panic-redeem or liquidate your SIPs before time to seize the gains. However, this will hamper your long-term financial goals, and if you stop SIP or miss instalments, you might lose the advantage of compounding and thereby miss your investment target. Therefore, it’s crucial to continue investing until your objective is met.
  • Invest the right amount in your SIPsAlthough you have selected a worthy scheme, you could still fall short of reaching your goal if you do not invest an adequate amount. Your targeted corpus and the investment horizon for a goal will determine how much you need to invest on a monthly basis. Setting reasonable return expectations is crucial when determining the SIP amount. You must also account for inflation when determining the investment amount. Additionally, you may have started small, but as you grow in your career or business, you can top-up (increase) the SIP amount in line with your rising income levels.

The Final Perspective…

While it is hard to pinpoint the ideal time to begin or stop your SIPs, one must not let market downturns impair their investment goals in the short term. The majority of seasoned investors will agree that when it comes to investing, what matters is how regularly SIPs are initiated, not at what market levels. One should bear in mind that building wealth is a long-term commitment, and through regular investments & top-ups in SIPs, one can potentially achieve their financial goals.

This article first appeared on PersonalFN here

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