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, SWP 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 (ā¹1000/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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Should we then wait, skip or stop our equity SIP?
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 āmoney is availableā.
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 21000: what should you do with your equity SIPs? Start, stop or continue? first appeared on 08 Dec 2023 at https://arthgyaan.com
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