Don't Allow Short Term SIP Returns To Dampen Your Spirits

Hemant Rustagi
Chief Executive Officer,
Wiseinvest Advisors 

The stock market has been having a rough time over the last couple of months. The Sensex and Nifty are down around 10 percent from their peaks. In fact, the correction in mid-cap and small-cap stocks has been much deeper.

A combination of domestic and global factors like rising bond yields, reintroduction of long-term capital gains tax on equities in the Union Budget 2018, a large-scale fraud at Punjab National Bank, emerging political uncertainty in the country after BJP's defeat in the recent by-polls in UP and Bihar, US President Donald Trump's trade tariffs and tightening of rates by the US Federal Reserve have contributed to this volatility in the market. On the positive side, India's Q3 GDP data grew at 7.2 per cent, up from 6.5 per cent and 5.7 per cent in the previous two quarters, respectively. The Q3 GDP data is the best growth rate recorded in a year.

While the current volatility doesnot really indicate reversal of the bull market trend, investors will well to brace themselves for a period of volatility in the near term. However, they must also remember that volatility in the stock market is a natural phenomenon and, hence,the key would be to keep their focus on their asset allocation. Although the current fall in the stock market has negatively impacted the portfolios of equity investors, the impact is felt more by those who started investing during the last one year or so. In fact, even those investors who began investing through SIP during this period are witnessing either very low or in some cases negative returns. No doubt, a situation like this can be unnerving for investors who have not yet become familiar with the vagaries of the stock market. Some may have even started wondering whether they did the right thing by investing in equity and equity-oriented funds.

It is important for these investors not to panic and tackle the current situation in the right way. First, they must remember that one year is too short a period to analyze the performance of equity and equity-oriented funds. Second, the basic objective of investing through SIP is to accumulate a corpus by following a disciplined approach over a committed time horizon without having to worry about the market levels. Third, investments made during volatile periods help in bringing the average cost down. In other words, when one invests through the volatile periods, the benefit comes in the form of getting more units allotted in a falling market. Last, but not the least, the disciplined investors are usually the first ones to benefit when the market starts recovering from a rough patch.

While investing through SIP doesnot protect investors completely from the volatility, the discipline of investing a fixed amount at a fixed interval ensures that impact is much less on the performance of the funds. Simply put, it always pays to invest for the long term as well as stay committed to one's defined time horizon to realize the true potential of equity as an asset class. Any haphazard changes in asset allocation based on short-term trends in the market may result in a huge shortfall in what one may be able to accumulate as against the requirement to fulfil long-term investment goals like children's education and retirement planning.

The right way to not feel compelled to act impulsively during such volatile periods is to follow a goal-based investment approach. Since this process involves assigning a time horizon to each of the goals, only long-term monies get directed to equity and equity-oriented funds. This goes a long way in allowing investors to stay calm during the turbulent periods and,as a result,the investment process continues uninterruptedly.

If you are one of those investors who may be facing the dilemma of what to do now, you will take a major step towards building your financial future by not panicking and avoiding to make a mistake of disrupting a carefully planned investment process. In fact, if you began investing without having a well established time horizon, it is time to do so now. Remember, equity investments require a time commitment and hence you must have one..