Current market conditions have led to frantic selling by many investors. And this selling is not restricted to stocks alone.
Many investors have redeemed their mutual fund schemes and have stopped their SIPs.
Wealth showed you how current market conditions work in favour of SIPs and present the best opportunity to average your cost.
But, when the going gets bad (this time it has got worse!), emotions get the better of us.
Just like it did for 31 year old Abhishek Mistry.
Abhishek is into the business of manufacturing electronic components and stays with his wife and daughter in Mumbai. Apart from catching up with old friends and going for his regular jog, he takes a keen interest in investing in stocks and mutual funds.
In November 2007, he activated a monthly SIP of Rs 1000 into the Reliance Diversified Power Sector Fund, for a period of 5 years.
Initially, when the markets started falling early this year, Abhishek carried on with the SIP. However, when the indices fell harder, Abhishek (intentionally) defaulted on his SIP, since March 2008. None of the installments that fell on the fifth of every month got cleared. Now, he has accumulated the funds of the last eight months (Rs 8000) and wants to invest a lump sum amount, when the market has bottomed out.
He wants to know:
- Whether he did the right thing by defaulting on his SIPs when markets were falling.
- If this will hamper his credit rating with the bank.
wealth clears Abhishek’s predicament.
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Was ‘defaulting’ on SIP the right option?
Let's look at two scenarios to find the answer to this one:
Scenario 1: He invests the lump sum in October (Rs 8,000)
Units allotted
5-Nov-07
1,000
75.71
13.21
5-Dec-07
1,000
78.35
12.76
5-Jan-08
1,000
87.74
11.40
5-Feb-08
8,000 (lump sum)
40.78
13.24
20-Oct-08
1,000
75.53
196.16
Total
12,000
Avg cost = 48.63
246.77
Note: SIP was made in Reliance Diversified Power Sector Fund
This way, he would have received 246.77 units at an average purchase price of Rs 48.63.
Scenario 2: He continues with his SIP
Units allotted
5-Nov-07
1,000
75.71
13.21
5-Dec-07
1,000
78.35
12.76
5-Jan-08
1,000
87.74
11.40
5-Feb-08
8,000 (lump sum)
40.78
13.24
5-Mar-08
1,000
66.02
15.15
5-Apr-08
1,000
61.04
16.38
5-May-08
1,000
68.18
14.67
5-Jun-08
1,000
60.30
16.58
5-July-08
1,000
52.91
18.90
5-Aug-08
1,000
59.28
16.87
5-Sept-08
1,000
57.63
17.35
5-Oct-08
1,000
50.20
19.92
Total
12,000
Avg cost = 64.37
186.43
Note: SIP was made in Reliance Diversified Power Sector Fund
He would have received 186.43 units at an average cost of Rs 64.37.
At first glance, it might seem like Abhishek made the right move, since investing a lump sum at this stage would give him more units at a lower price.
But was he right? NO!
Resorting to this cannot help him build long term wealth. Here's why:
- Timing the market is an impossible feat to achieve. Even if Abhishek successfully reduces his buying cost now (through a lump sum investment), he cannot predict market moves all the time. For instance, what if the NAV falls to Rs 30 or Rs 25 after his lump sum investment? What would he do then? Here is where SIPs bail you out! They even out markets ups and downs. Read more !
- His initial investment was for a period of five years. Breaking his investment mid way defeats the very purpose of building long term wealth.
“If you regularly miss out on your SIPs, it can impact your corpus considerably,” says certified financial planner, Kartik Jhaveri.
- SIPs inculcate investment discipline. A commitment of a small sum is all it takes to generate good returns over the long term.
Financial domain trainer PV Subramanyam says, “The fall from 21,000 to 10,000 has been very steep and it’s a great time to get the cheapest deal on your SIPs. Once the markets turn around, you will only stand to gain.”
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Will the default hamper his credit rating?
The answer: NO
In SIPs, you invest a regular sum of money at pre-determined intervals (fortnightly, monthly etc.). This investment is made either through post dated cheques or electronic clearing services (ECS) in which the mutual fund debits the amount automatically from your bank account on the given date. If you don’t have money in your bank account for a given month, no units will be allotted to you for that month.
SIP is a regular investment, unlike a loan EMI which is a regular payment (in which you owe money to the bank).
So, the bank has nothing to do whether you continue your SIPs or not. Hence, this will not impact your credit rating with the bank.
But was he right? NO!
Resorting to this cannot help him build long term wealth. Here's why:
- Timing the market is an impossible feat to achieve. Even if Abhishek successfully reduces his buying cost now (through a lump sum investment), he cannot predict market moves all the time. For instance, what if the NAV falls to Rs 30 or Rs 25 after his lump sum investment? What would he do then? Here is where SIPs bail you out! They even out markets ups and downs. Read more !
- His initial investment was for a period of five years. Breaking his investment mid way defeats the very purpose of building long term wealth.
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“If you regularly miss out on your SIPs, it can impact your corpus considerably,” says certified financial planner, Kartik Jhaveri.
- SIPs inculcate investment discipline. A commitment of a small sum is all it takes to generate good returns over the long term.
Financial domain trainer PV Subramanyam says, “The fall from 21,000 to 10,000 has been very steep and it’s a great time to get the cheapest deal on your SIPs. Once the markets turn around, you will only stand to gain.”
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