In these turbulent times an investor should be careful while investing in the stock markets. They should only invest if they have excess funds.
SIPs are a great way of investing. Most people, perhaps you too, opt for this method of investing for long-term goals. But the fact is SIPs have not delivered positive returns for several years now.
So, the question that arises now, and even more so post the COVID-19 crash is this – Should I stop my SIPs?
Recent AMFI data revealed, that even in the wake of the COVID-19 pandemic investors have continued to invest via SIPs.
In fact, if you were to compare the SIP inflows for the months of March and April 2020 to the same months last year (2019), it has increased.
So, are investors making a mistake by continuing their investments in a falling market?
Should you stop your SIPs?
Or consider increasing their exposure?
Let’s try and understand this one at a time.
First off, let’s recollect how SIPs help you. They:
Help you develop a discipline and a regular saving habit.
Make investing effortless as the money is debited automatically from your bank account every month as per the contract.
Reduce the risk of mis-timing the markets and solve the problem of when to invest. Basically, whether the markets move up or down, you stay invested.
So, this tells us that SIPs are not meant to help you turn a bad market into a good one.
Simply because they don’t have the power to do that. They are only meant to serve these 3 purposes mentioned above:
Let’s understand this further with an example.
Let’s assume you think the markets are overpriced i.e., you expect them to fall further, from 31,000 now to 28,000.
SIP or lumpsum you will lose money if you were to invest your savings today in the stock markets. The method of your choice doesn’t matter. The money will eventually be allocated to stock market, which will fall along with the value of your investment.
On the other hand, if you expect the markets to rise from 31,000 now to 35,000. You will be better off not taking the SIP route and investing all your savings at once (lumpsum). This way you will get that extra bang for your buck. But if you put it in the SIP your cost of investments will also rise with the markets.
Both scenarios prove that SIPs cannot save your investments from a falling market. Sure, they are advantageous as they average out the cost of your investment. Especially in a falling market. But they certainly cannot ‘turn a bad market into a good one’.
In the end, the decision you make today depends entirely on your view of the market
If you think the virus is yet to wreak havoc on the country and the world, you are better off stopping your SIPs. Wait for them to fall further and then make a lumpsum investment.
If you think the markets have bottomed out you should invest now. Aim for making a larger investment (lumpsum) than the smaller SIP amount.
But if you are confused, as most other investors usually are, continue with your SIP installments. Allow them to serve their purpose: to help you alleviate the risk of mis-timing the markets. And average out your total cost of investments.
But continuing to invest is definitely going to help you if you are an existing investor
As it will help you average out your cost of investing. You must have invested in the markets at 38,000-40,000 in the past few months. So, buying now at 31,000-32,000 will help you lower your cost. Whereas selling will mean you are realizing your notional loss. Which can be difficult to recover from. So as an existing investor you shouldn’t sell your stock market investments unless you really need the money.
But there is a caveat to it.
As we are in extraordinary times. Which require us to undertake extraordinary measures
There is a lot of uncertainty surrounding this virus. Even the most successful investors are more unsure than worried of what is ahead of us. Nobody knows the trajectory of the virus and its effect (long-lasting or short-lived) on the economies of the world.
Hence the first rule any investor should follow is: Ensure immediate financial security
Add to your emergency fund first. Save enough money that can fund your 9-12 months of living expenses at least. This should be your top priority. So, you and your family can sail through these uncertain times with utmost financial certainty.
Once you have an adequate emergency fund any excess money can be allocated towards your investments. New or old.
No matter how attractive the stock markets seem it just doesn’t make sense to invest now if you don’t have 6-9 months’ worth of living expenses kept aside.
Even if your employment is not at risk today, it might be in the near future. The probability of companies across the world facing a tough time is very high. Which might force them to lay off employees in order to save them. Thereby putting your monthly income in jeopardy.
It might be the right time to invest, but not the right time to take on additional risks
Markets do seem attractive. If you were to think positively, they are at levels they were some 3-4 years ago. But this alone doesn’t mean that you should invest more in equities.
Investments should purely be defined on your financial goals. As your goals help you ascertain your time horizon and return-risk appetite.
Click here for the latest coronavirus news and updates. According to experts, people over 60 and those who are immunocompromised continue to be the most at risk. If you have questions, please refer to the WHO’s resource guides.