Another manic Monday market opening in March. This alliteration is likely to cause a lot of anxiety to many investors who are investing regularly in equity markets to create long term wealth. Not only is this long-term wealth eroding fast, but also given the uncertain global environment, one is inclined to believe that there will be more pain.
It’s valid to ask: Should I stop regular investments – or mutual fund SIPS, protect my capital and restart once the fall is complete and the market trend turns positive?
Let’s take this in two parts: Should you stop regular SIPs in equity? Do you need to protect capital?
What happens if you stop SIPs?
The market correction has been rather sharp with a 22% correction In Nifty 50 since the start of the month till 20th March, followed by a 13% fall in a single day on the 23rd of March. While this has resulted in a quick erosion in the value of whatever gains you had accumulated till now in equity, it has also thrown up the opportunity to invest from this point onwards at lower levels.
Let’s say you invest Rs 50,000 every month in the Nifty 50 from March 2010, you would have accumulated 827 units of the Nifty 50 till March 2020. Out of these, 63% or 518 units were accumulated till March 2015 which is the mid-way mark (see graph). This happened because markets rose at a faster pace post that and hence, a lower number of units are added each month.
It’s the higher number of units accumulated in the first five years which will add more to your investment value at the end of ten years. At a Nifty 50 level of 11,000, you got 4.5 units invested for a Rs 50,000 investment; now at Nifty 50 level of 8700, your SIP will get you 5.7 units. If you keep adding more units at a lower level, you will gain more when markets return to higher levels. The fall in value enables you to add more units for the same amount of investment. In this way, you have more to gain when the recovery begins as you have added units at a faster pace.
What you need to understand is that the job of your equity investments or your allocation to equity is not to preserve capital. Capital preservation is the job of your allocation to fixed-income securities.