Mutual Funds SIP: Why market sentiment doesn’t matter for an investor

Mutual funds SIP: Why market sentiment doesn't matter for an investor

In continuation to White ok Capital AMC’s earlier SIP report titled, ‘SIP Analysis Report’, the company has come up with further insights on “Which is better, starting SIP at the Top or Bottom?”

The report is based on a detailed analysis using long-period data of SIP BSE Sensex TRI (last 27 years) and considers all those periods when the equity market has fallen more than 20% from its Top. The below table refers investment summary of two investors, one who started a ₹10,000 monthly SIP at the Top of various market cycles.

What Are Mutual Funds?

A mutual funds is a pool of money managed by a professional Fund Manager.

It is a trust that collects money from a number of investors who share a common investment objective and invests the same in equities, bonds, money market instruments and/or other securities. And the income / gains generated from this collective investment is distributed proportionately amongst the investors after deducting applicable expenses and levies, by calculating a scheme’s “Net Asset Value” or NAV. Simply put, the money pooled in by a large number of investors is what makes up a Mutual Funds.

Here’s a simple way to understand the concept of a Mutual Funds Unit. Let’s say that there is a box of 12 chocolates costing ₹40. Four friends decide to buy the same, but they have only ₹10 each and the shopkeeper only sells by the box. So the friends then decide to pool in ₹10 each and buy the box of 12 chocolates. Now based on their contribution, they each receive 3 chocolates or 3 units, if equated with Mutual Funds.

And how do you calculate the cost of one unit? Simply divide the total amount with the total number of chocolates: 40/12 = 3.33.

So if you were to multiply the number of units (3) with the cost per unit (3.33), you get the initial investment of ₹10.

This results in each friend being a unit holder in the box of chocolates that is collectively owned by all of them, with each person being a part owner of the box.

Next, let us understand what is “Net Asset Value” or NAV. Just like an equity share has a traded price, a mutual funds unit has Net Asset Value per Unit. The NAV is the combined market value of the shares, bonds and securities held by a fund on any particular day (as reduced by permitted expenses and charges). NAV per Unit represents the market value of all the Units in a mutual funds scheme on a given day, net of all expenses and liabilities plus income accrued, divided by the outstanding number of Units in the scheme.

Mutual funds are ideal for investors who either lack large sums for investment, or for those who neither have the inclination nor the time to research the market, yet want to grow their wealth. The money collected in mutual funds is invested by professional fund managers in line with the scheme’s stated objective. In return, the fund house charges a small fee which is deducted from the investment. The fees charged by mutual funds are regulated and are subject to certain limits specified by the Securities and Exchange Board of India (SEBI).

India has one of the highest savings rate globally. This penchant for wealth creation makes it necessary for Indian investors to look beyond the traditionally favoured bank FDs and gold towards mutual funds. However, lack of awareness has made mutual funds a less preferred investment avenue.

Mutual funds offer multiple product choices for investment across the financial spectrum. As investment goals vary – post-retirement expenses, money for children’s education or marriage, house purchase, etc. – the products required to achieve these goals vary too. The Indian mutual fund industry offers a plethora of schemes and caters to all types of investor needs.

Mutual funds offer an excellent avenue for retail investors to participate and benefit from the uptrends in capital markets. While investing in mutual funds can be beneficial, selecting the right fund can be challenging. Hence, investors should do proper due diligence of the fund and take into consideration the risk-return trade-off and time horizon or consult a professional investment adviser. Further, in order to reap maximum benefit from mutual fund investments, it is important for investors to diversify across different categories of funds such as equity, debt and gold.

While investors of all categories can invest in securities market on their own, a mutual fund is a better choice for the only reason that all benefits come in a package.

Also Read: Money Earning Apps: In India Without Investment

How to read the above table:

If someone would have started a monthly SIP of ₹10,000 in S&P BSE Sensex TRI during January 2008 (at the peak of market cycle six as per the above table), as of 30th September 2023, they would have invested ₹18.9 Lakh and the current value of this investment would have been ₹58.5 Lakh at an XIRR of 13.2%.

Similarly, if somebody had started this SIP in March 2009 (at the bottom of market cycle six as per the above table), as of September 2023, they would have invested ₹17.5 Lakh (Rs. 1.4 Lakh less than earlier investor) and the current value of this investment would have been Rs. 49.8 Lakh (Rs. 8.7 Lakh less than earlier investor) at an XIRR of 13.3%.

Key findings from the report

1) It is interesting to note that while the % return is marginally higher for SIPs started at the bottom of the market cycle, the absolute gain in the rupee term (Wealth Creation) is far higher for SIPs that began at the top.

2) The “Cost of Delay” of starting SIP late can be huge over the long term. The longer the market takes to reach the bottom, the higher the “Cost of Delay,” keeping all other things constant.

3) Even the marginal difference of % return goes away over the long-term, irrespective of whether you started at the top or bottom (refer to the return difference for SIPs during the first 6 Market Cycles, i.e. in long-term).

The festive season brings with it a sense of joy and celebration, and it is also an opportune time for individuals to make wise financial decisions.

Amidst festivals, numerous individuals receive gifts or bonuses from their employers, creating an ideal opportunity to channel these monetary windfalls into systematic investment plans (SIPs).

Given the inherent volatility of the market, SIPs may present a secure refuge for investors, ensuring a stable investment avenue.

On comparing SIPs’ monthly contribution in the last seven years, it is observed that the SIP amount has steadily increased from ₹3,000 crore to more than ₹16,000 crore by July 2023, as per the data from AMFI.

Also Read: Equity mutual fund inflows surge to ₹19,932 crore in October, SIP contributions at record-high: AMFI data

Even though SIPs have become a household name and before embarking on an SIP investment journey, it’s important to consider a few important factors to make informed decisions.

Define your financial goals

The first step before investing in SIPs, or any investment vehicle for that matter, is to define your financial goals.

Are you investing for long-term wealth creation, a specific financial milestone like buying a house, funding your child’s education, or perhaps for retirement?

Defining your goals will help you choose the right SIP plans, investment horizon, and risk tolerance.

The festive season often prompts impulsive decisions, but aligning your investments with your goals ensures a disciplined approach.

Assess your risk appetite

Investing involves risk, and your risk tolerance plays a pivotal role in deciding the asset allocation of your SIP portfolio. The festive season might tempt you to chase high-return opportunities, but it’s crucial to assess your risk appetite objectively.

Are you comfortable with the potential fluctuations in the value of your investments, or do you prefer a more stable, conservative approach?

Understanding your risk profile will help you select SIP funds that match your comfort level.

Also Read: HDFC Mutual Funds captures the unbreakable bond on Children’s Day

Diversify your SIP portfolio

The allure of the festive season might lead investors to concentrate their investments in a particular sector or asset class. However, diversification remains a cornerstone of sound investment strategy.

Diversifying your SIP portfolio across different scheme categories depending upon your risk profile and financial needs may mitigate risks associated with a particular asset class. It’s wise to avoid putting all your financial eggs in one basket, even during the festive zeal.

Also Read: DSP Mutual Funds launches DSP Gold ETF Fund of Fund. All you need to know

Research and evaluate fund houses and schemes

The availability of numerous SIP options can be overwhelming and confusing at times.

During the festive season, there could be a proliferation of special offers and promotions that could influence investment decisions. It’s crucial to know about the fund house, the range of schemes available, the track record, fund management and the terms of the SIP schemes you are considering.

Past performance cannot be a guarantee for future results, at best it can provide insights into a fund’s consistency and stability. Opt for SIPs managed by experienced professionals and backed by reputable fund houses.

Maintain disciplined investing practices

Amidst the festivities and excitement, it’s important to maintain disciplined investing practices. SIPs thrive on consistency and regularity. The festive season’s expenses can sometimes disrupt your investment schedule, leading to missed contributions.

Setting up automated SIPs can help ensure that you stay committed to your investment plan, regardless of the festivities. Remember that SIPs are designed for the long haul, allowing you to benefit from the power of compounding over time.

In conclusion, investing in SIPs during the festive season can indeed be a rewarding decision. If undertaken with careful consideration, one can navigate the festive investment landscape effectively.

Remember that time spent in the market is more important than timing the market. Thus, investing is a marathon, and the principles of sound financial planning will remain the bedrock for investments in all seasons.

This festive season, embark on your SIP journey with wisdom and prudence and pave the way for a brighter financial future.