The markets have crashed over 1500 points in September 2018 alone after an increase of over 1000 points in July-August 2018. This has been the most volatile period for the market in a very long time. Along with direct equities, mutual funds have also seen the pressure of market correction. Investors have felt the jitters of the market correction. It’s ok to feel anxious about the investments. But investing and staying invested in mutual funds during volatility in the market is very important.
Let’s look at the story of 4 investors who invested in a mutual fund at different time periods.
Here’s a story of 4 investor friends – Ankit, Bala, Charu & Deepak. All of them start investing in SIP of the popular HDFC Top 100 Fund. Each of them had different strategies to start investing but their objective was the same, i.e. to build the most wealth.
a. Ankit starts his SIPs on Jan 1, 2007, when the market had been growing for 3-4 years
b. Bala starts his SIPs on Jan 1, 2008, when the market has raced to their peak; Bala does not want to lose out of wealth creation in growing markets
c. Charu starts her SIPs on Jan 1, 2009, at the peak of Global recession when the market had crashed by 50% from its peak; Charu believes that she will make more money because of starting when markets are low!
d. Deepak starts his SIPs on Jan 1, 2010, after waiting for the recession to get over and markets to stabilize.
Who got the biggest returns and made the most money?
- Do you think that Ankit and Bala would make low returns because their investment suffered from recession in 2008? Wrong. In fact, Ankit and Bala made higher annualized SIP returns than Charu and Deepak. Can’t believe? Check out the table below.
Why did Ankit and Bala make higher returns than Charu and Deepak in spite of recession?
- The answer lies in volatility. When investor continues their SIPs through periods of volatility, they get a higher return from their investments in the long run. Contrary to what it looks like, volatility is a friend to SIP investors.
What about the percentage returns?
- You will again be surprised to know that there is not much difference between the 10-year SIP CAGR returns of these 4 investors. The returns range from 11.0% to 12.2% which reaffirms that timing the market is not important when investing in SIP.
Should I wait to start SIP?
Absolutely not. As you can see, Ankit got 73% higher returns by investing only 34% more than Deepak. The earlier you start your SIPs, the higher the wealth you make in the long term.
In a Nutshell
- SIP is a great tool to build wealth in the long term & they benefit from market volatility that you see today.
- The best time to start a SIP is NOW – Long-term SIP returns do not depend much on the starting time as we saw in the above example. However, the sooner you invest the more your wealth grows.
- Volatility helps SIP investors to boost returns
- Do not stop your SIP even in volatile market conditions
- A, B, C & D are all winners but Ankit (A) made the most wealth. Be Ankit!