As the market keeps rising to new all-time high figures, how much returns should equity investors expect from their investments running in SIP form.
This article is a part of our detailed article series on what to do when stock markets reach a lifetime high. Ensure you have read the other parts here:
Investors, both new and old, wonder what should they do with their equity investments running in SIP form: start, continue or stop? At this point, investors should quickly review the definition of SIP, SWPP and STP before continuing:
All of these are standing instructions that get executed as per a schedule you specify:
Systematic Investment Plan (SIP): Money from a bank account is invested into a mutual fund, typically once a month
Systematic Transfer Plan (SIP): Units from a mutual fund are redeemed to invest in another mutual fund of the same AMC
Systematic Withdrawal Plan (SWP): This is the reverse of the SIP. You sell the units from a mutual fund to send money to a bank account
SIP returns exactly at the ATH levels are slightly lower
As expected intuitively, SIP returns for both short and long-term SIPs (₹1000/month in Nifty 50 price index) started at the time of all-time high is slightly lower than other periods as the charts below show:
Apart from the 20-year SIP case, all the others have slightly higher returns when the SIP series starts on an ATH dates vs. when it does not.
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To answer this question, let us review the Nifty 50 price index since 1993. Over this period, there have been almost 500 days where the index has hit an all-time high.
There is unfortunately no shortcuts here in case you are expecting a simple go, halt or skip answer. Investment, like many other things in life, is simple once you understand it but not easy. Therefore, we will follow a systematic approach here via a series of questions:
Have you identified your investment goals?
Goal setting helps you understand the priorities of your life, set the future of you and your family, understand the various money-related challenges that come and be best prepared for the future financially. Goals give direction and momentum to your financial life:
direction: if you know why you need it then you know what to invest for. Creating wealth is not a goal. But investing for the purpose of sending your child to Harvard in 15 years is a goal
momentum: this allows you to build investing discipline and track progress along the compounding journey. Without a goal, it is likely that the money will be spent on frivolous things just because “money is available”.
Rebalancing is a risk-management tool that allows you to systematically buy low and sell high.
We will use corridor-based rebalancing as the decision-making framework here. We will use 5% as a corridor and a target asset allocation between two asset classes equity and debt. We will rebalance if the market movement shows that the current allocation has deviated by 5% from the target. If you are unaware of the concept of rebalancing, then please review this article before proceeding: Portfolio rebalancing during goal-based investing: why, when and how?
Once you have completed this framework, the next steps regarding your equity SIP will be clear. To help you, we have a list of extensive case-studies that you may refer below.
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This post titled Nifty above 20000: what should you do with your equity SIPs? Start, stop or continue? first appeared on 17 Sep 2023 at https://arthgyaan.com
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