While many people think that investing is all about timing the market, and that this also applies to systematic investment plans (SIPs), one must understand that a mutual fund SIP is all about discipline investing. You choose an amount and a frequency, usually monthly, and consistently invest in the mutual fund scheme of your choice, regardless of market conditions.
In this piece, we look at what experts say about investing in mutual fund SIPs.
Bharat Phatak, Director, Scripbox: The beauty of SIPs lies in their ability not to require you to “time” the market. You can increase your SIP amount each year as your income grows, but you should continue to invest it evenly until the subsequent adjustment. SIPs should not be abruptly started or stopped. They are designed to be successful over the long term, and the fundamental principle is that timing the market is impossible. During market downturns, it may be tempting to pause an SIP. However, SIPs eliminate the need for market timing. Your SIP will ultimately be successful, regardless of short-term fluctuations.
Aniruddha Bose, Chief Operating Officer, FinEdge: Trying to time the market with your SIPs actually defeats the core premise of systematic investing. The most crucial benefit of investing in SIPs is “rupee cost averaging”—a mechanism by which the purchase cost of your units gets averaged out over the long run by investing the same amount every month in a disciplined manner. When markets rise, you receive a relatively lower number of units from your SIP tranche. When they correct, you receive more units for the same rupee value. The natural human tendency is to do the opposite: Investing more after markets have gone up and panic-redeem or fence-sit when markets are cheap. The “dispassionate” nature of SIP investing is designed to insulate us from this trap. When you try to time your SIPs, you take away these benefits.
A classic example of this tendency from the recent past is when investors rushed in to stop their SIPs during the pandemic three years ago, intending to sit on the sidelines and time their restart later. However, the turnaround was so sharp that when many of these investors got around to restarting their SIPs, markets had already doubled from their bottom. On the other hand, investors who kept their SIPs going without timing the market benefitted tremendously, with the SIP tranches that hit the market during the lows of 2020, returning CAGRs as high as 40–50% over the past three years.
Hemant Sood, Founder of Findoc: Firstly, SIPs eliminate guesswork. Timing the market accurately involves predicting the short-term movements of stocks or the market as a whole. Making frequent buy or sell decisions based on market trends is difficult. SIPs, on the other hand, eliminate the need for such guesswork by following a systematic approach that relies on consistency and discipline. Secondly, it overcomes emotional bias. Emotional biases like greed and fear often influence investors’ decisions. Trying to predict market movements to make profitable decisions intensifies these biases, leading to impulsive and potentially detrimental actions. SIPs promote a rational and systematic investment approach, reducing the impact of emotional biases. Third, SIPs cultivate a habit of regular investing, instilling financial discipline. Investors develop a constant approach by automating investments, irrespective of market conditions.
Sahil Kapoor, Senior Executive Vice President, 360 ONE Wealth: Timing the market can be futile due to the transient nature of market events and the inherent difficulty and ineffectiveness of accurately assessing every market movement. Conversely, regular investments in the form of SIPs, regardless of the prevailing state of the stock market, aid in systematically building wealth over the long term. Creating and adhering to a suitable asset allocation strategy also ensures that you are systematic in your investment process and can avoid behavioural biases associated with market fluctuations. On the other hand, a few asset managers offer a Smart SIP option, which essentially increases the SIP amount during market corrections. This may be beneficial for investors who have a long-term investment horizon.
Point to note
While it is impossible to determine the perfect time to start or end your SIPs because the market is unpredictable, one must link their SIP investments with their long-term and short-term financial goals and achieve them over time.
Thus, one must not temporarily let market setbacks hinder their investment goals. If your investments are spread out over time and diversified, one bad year is less likely to derail your entire plan. Therefore, consistent and frequent SIP investments are crucial, especially during market volatility.