Most investors are worried due to their SIPs giving unexpectedly lower returns. As reported earlier, only a few equity schemes have given double-digit reruns in the last one year. Amfi data on SIP collection shows muted growth in the months of April, May and June. Number of SIPs discontinued is also on a rise. But stopping your SIPs at this time could be a mistake. This is the time when your mutual fund SIPs will actually be working harder to stun you with good returns as soon as the broader markets go up.
Kalpen Parekh, President, DSP Mutual Fund, in a tweet said, “When will SIPs work – just when it starts feeling that SIPs don’t work.” He adds, “SIP installments in flat to negative trending markets earn the best returns.”
How SIP installments in negative markets earn best returns?
Understand it like this- you had a budget of ₹10,000 to buy a pair of sport shoes. You check the website and thanks to the ongoing mega sale, you get that pair at 50% discount. So, instead of one pair, you buy two pairs. The same way, when the markets are down and at cheaper valuations, your monthly SIP ends up buying and accumulating more units of the fund. As and when the markets move up, the prices go up and the units accumulated during the discounted period give you far better returns.
This may actually be the worst time to stop your SIPs. The best you can do to your investment portfolio at the moment is to continue with your SIP in mutual funds, provided you are not facing any financial trouble due to job loss or medical emergency created by the ongoing pandemic.
Kalpen Parekh showed a returns chart of SIP in a fund vs Nifty index for the five year period between January 2008 and December 2012. The stock markets saw one of their worst crashes in January 2008. The chart shows how the SIP investment earns different returns over a period of time and then it averages out those returns. The minimum return earned during the period was 8.38%, maximum return earned was 14.99% and the returns averaged out to 13.23%.
Here’s the tweet: