Gurmeet Chadha, the co-founder and chief executive officer of Complete Circle Capital, put out some interesting facts on Twitter two weeks ago.
- Had you started your SIP in January 2008, in a Nifty index fund, your 13-year XIRR would be 14.4%.
- Had you started your SIP in October 2008, in a Nifty index fund, your 13-year XIRR would be 14.9%.
(XIRR signified Extended Internal Rate of Return. It denotes the return on investments where multiple transactions took place at different points of time.)
The dates are very shrewdly arrived upon. January is when the market scaled the 21,000 peak, and the bulls were seemingly unstoppable. Then came the Global Financial Crisis (GFC), and the Sensex tumbled down to 8,000 levels by October.
By presenting those numbers, Gurmeet made it clear that waiting to enter at the right time is pointless when your runway is long.
What really is an SIP?
I know this will sound terribly basic to many of you, but I have been getting a lot of queries regarding this. And, in many cases, novice investors are conflating it with an investment.
A Systematic Investment Plan, or SIP, is an investing strategy, not an investment, in the same way a spoon is a great tool for stirring soup but is not a recipe.
You pick your investment (a mutual fund), and you decide to invest into it systematically (SIP). Every single month, a fixed amount is debited from your bank account and credited to the fund of your choice. The amount of money is fixed, but the units vary. You get more units when the market is down (and the net asset value of the fund drops), and fewer units when the market climbs. Over the years, and over market cycles, this balances out in your favour. This is why you need to think in terms of years when you opt for an SIP.
Would it not be wiser to just invest lumpsum amounts when the market is low?
That certainly does have the virtue of reasoned logic. Get in when the market is in the doldrums, and exit when it peaks. When you invest in a bad market, the chances of you raking in huge returns on your investment is high. Appealing though it may sound, here is what you must keep in mind.
There's no such thing as a typical investor
With lumpsum investing, you are hostage to market timing.
What if the market plummets after you invest? The fear of regret cannot be underestimated or brushed aside. What if you are paralysed by uncertainty? It falls and you keep believing it will fall more, and you hold on, and you keep holding on.
Let’s look at what happened in 2008:
- January 18: Sensex tumbled 786 points from the day's high and ended with a loss of 687 points. The index shed 1,813 points that week.
- January 21: Sensex dropped by 1,408 points.
- January 22: Biggest intra-day fall till date.
- February 11: Sensex closed with a loss of 834 points.
- March 3: Sensex lost 900 points.
- March 17: Sensex crashed by 951 points.
- October 24: Sensex plunged by 1,070 points.
A pertinent point is that the drop was not linear and the Sensex remained range bound and fluctuated over these months. If we go back slightly, on December 17, 2007, the Sensex closed 769 points lower, but on January 8, 2008, it crossed the 21,000 market for the first time.
How on earth does one time the bottom?
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Fear can be crippling.
During such dramatic times, you will have to restrain yourself from pulling your money out when everyone is heading for the exits.
Look at the drama played out over the past two decades that impacted the stock market: Asian financial crisis (1997), dotcom meltdown (2000), the India-Pakistan stand-off that brought both sides close to war (2001), the 9/11 terrorist attacks on the Twin Towers in New York (2001), war in Iraq (2003), global financial crisis (2008), and the eruption of the European debt debacle (2010). In 2013, there was a pall of gloom hanging over Indian investors as the market reeled under talks of tapering by the U.S. Federal Reserve. It sent the rupee crashing in an economy that was already battling with a slowdown. In 2015, we had the de-pegging of the Swiss franc, Renminbi’s devaluation, Greece on the verge of crashing out of the euro, bursting of China’s stock bubble, a bloodbath for commodities and sliding crude oil prices. In 2020, there was a brutal bear market as the world went into a pandemic-induced lockdown.
Now imagine if your entire strategy was timing the market. During such market upheavals, not only would you have to exercise restrain from pulling your earlier investments out, but you would have to put in lumpsum amounts. Most investors do NOT have the emotional and psychological bandwidth to do so.
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When timing goes wrong.
Since timing would be your investing strategy, you would have to keep timing the market over the years to decide the best time to enter.
Let’s say you invested in the market in January 2008 when the Sensex was at around 21,000. Of course, you had no idea whatsoever that the market had peaked. In fact, you thought that it would carry on for many years.
Can you imagine the psychological impact of seeing the worth of your investment by December 2008 when the Sensex dipped to a measly 8,500?
Do you get the drift? The theory of getting in when the market falls is sound. But when it comes to investing, there are emotions at play.
Now, for the practical.
Crucially, would the cash be available to invest at one go? The good thing about systematic investing is that the pressure on your resources is low and consistency is maintained.
Investors don’t have huge amounts of money to invest at fixed intervals. Putting away small amounts every month or quarter actually works well for salaried individuals who have considerable outflows by way of children’s fees, living expenses, and loan payments.
The convenience and hassle-free benefits of the money getting deducted automatically from your bank account are unsurpassed. By circumventing the need for human intervention, you avoid the emotions of fear and uncertainty taking over. Neither do you have the stress of keeping tab on the market.
Opting for SIPs is more realistic from a logistical standpoint. It also helps overcome some of the psychological impediments that can bedevil investors.
If you want to know which funds to start investing in, read the suggestions on where to begin.
Larissa Fernand is Senior Editor at Morningstar India. You can follow her on Twitter.
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