26 April 2017 was a historic day for the equity stock markets because the Sensex ended a trading day above 30,000 points for the first time. The Bombay Stock Exchange (BSE) members also cut a 30kg cake to celebrate the crossing of the 30k threshold.
The markets are trading at an all-time high because of a number of reasons. The effects of demonetisation are expected to wane and the previous quarter’s results are expected to be stronger. The Indian economy itself is said to be stabilizing and a timely GST rollout is expected to add to this. Global cues are also in India’s favour right now. But apart from all of this, one important reason behind the current rally is the fact that the equity markets have seen high domestic inflows through mutual funds. The assets under management (AUM) of the Indian mutual fund industry has swelled in the past year or two. The market rally is great news for all of these investors because their mutual fund investments would be performing really well, but the rally can be a cause of concern for potential investors.
People who would have been thinking of starting a systematic investment plan (SIP) now would probably be considering holding back. Of course, a market peak is never a good time to invest a lump sum. But procrastinating an SIP would be a missed opportunity. Let’s understand why using two different scenarios of the markets going further up or the markets going down from here.
In case of a bull run
What happens if the markets keep going up from here? In this case, if you start an SIP now, you will be starting a low point for your investments. This means that your invested value will grow with the markets. Even if the upward trend doesn’t continue and the markets remain range-bound, you will still stand to do well by investing in actively-managed equity funds. If the journey is going to be rosy, why not get on board right away and take advantage?
In case of a bear phase
The fear that most investment procrastinators will have right now is that of a market crash. What if I start an SIP now and the markets crash in a few days or couple of months? All my invested money will go down in value. Yes, that can happen. But a market crash can also turn into a very good buying opportunity for long-term investors. If the markets crash in the coming months, your first and second SIP will be at a peak and the value of those investments will suffer. But the next SIPs will be at a low, which will work out well over the long-term.
Let’s look at what happened after previous market highs and subsequent crashes. Let’s suppose you started an SIP in a diversified equity fund in December 2007, just a month before the market crash of January 2008. From December 2007 and December 2008, the worst-performing fund was down by around -77%. Even the best-performing fund lost around -40%. But had you continued your SIP through the rough patch and kept investing for 3 years, your mutual fund would have recovered the losses and posted positive returns. The best-performing fund between December 2007 and December 2010 generated nearly 15% returns. The average performance was around 10% for this 3-year period among diversified equity funds.
Similarly, the markets crashed on 24 August 2015. Both the Sensex and Nifty went down by close to 6% on that day. Assuming that you had started an SIP in July 2015, your investments would have suffered after the market crash. But if you had continued investing till now, a well-performing fund would have given you around 25% returns from July 2015 to April 2017. This is how SIPs work out in favour of the investor even when the markets crash right after they begin investing.
The other reason why you shouldn’t procrastinate starting an SIP is because there is no end to procrastination. The market’s movements are something that we cannot predict. We don’t know if the current high will lead to more highs or end in a low. What we do know is that over the long-term, the markets reward systematic investors irrespective of the volatility.
This is why you should choose a well-performing equity fund that has a proven history and start an SIP in it even when the Sensex is at 30k. Choose a fund that has done well over different market conditions. Don’t opt for a recent outperformer. Choose a fund with a history that you can bank on and make sure you continue investing even through the bad times. You will be rewarded over time.
The beginning of a financial year is also the best time to start an SIP in a tax-saving ELSS fund. Use ClearTax to invest in ELSS funds quickly and paperlessly.