Equity mutual funds in India have witnessed a net outflow for the seventh straight month in January 2021. Investors seem to be taking money off the table in light of the market rising sharply every month starting from May 2020 when the pandemic had not yet hit its peak in India.
While investors started booking profits from July 2020 when Nifty was still 10% lower than the then all-time high of 12,200 in Feb. 2020, the index continued to surge. Nifty 50 index till date, has risen a further 50% from July 2020 levels.
Investors seem to be equating the sustained rally to a “bubble”, especially since corporate earnings are still lower, GDP continues to be in the negative zone and the entire population has not been vaccinated nor the herd immunity has kicked in.
Amidst all this, investors have started taking a cautionary stance by booking profits and redeeming their equity MFs investments.
In the last two decades, regular investing into equity mutual funds through the systematic investment plan (SIP) route has become a habit for many middle-class Indian investors.
Due to the underperformance of most of the MF schemes in the recent past despite the market being on an upswing, some analysts / experts have been recommending either stopping equity SIPs or booking profits / move towards other asset classes.
For those investors who continue to be bullish, experts are suggesting to shift towards lumpsum investment mode instead of SIPs.
Is it that easy? Can anybody predict and time the market accurately? What if we see a crash, as valuations are not justified? In that case averaging will come into play if we stay invested via SIPs and increase our overall portfolio returns.
Let’s assume the markets further go up from here as is being feared then the cost of purchase is escalated driving down the returns. In this case as well, the opportunity costs concept comes into play.
With interest rates at very low levels and after tax / real returns on fixed deposits near zero / negative and the real estate market in a flux, staying invested in equities through SIPs might still fetch comparatively higher returns.
We have tried to analyze whether taking the money out when the markets are at all time high is a good strategy.
To do this we compared two different time periods - Jan. 2008 to Dec. 2010 and Jan. 2015 to Feb. 2020. Why have we chosen these dates?
In Jan 2008, Nifty at 5624 had touched all-time highs and sentiments were quite similar to the present times. Subsequently, it crashed by 50% within 1 year and slowly started rising to achieve levels similar to Jan 2008 by Dec 2010 (5992).
Nifty delivered 6% on an absolute basis or 2% CAGR (point to point). Interestingly, in 31 out 35 months the index was lower than Jan 2008 levels with all the 4 positive months were at the end of CY 2010.
In Jan 2015, at 8662 Nifty again was at lifetime highs and was steadily rising making practically new highs till Feb 2020 (11962). Nifty was lower than Jan 2015 levels only in 22 out of 62 months. During these ~5 years Nifty clocked 38% absolute or ~6.4% CAGR returns.
Let us assume a person invested via a SIP in an equity MF (benchmarked to Nifty 50) or Nifty 50 Index fund.
The following is the comparative returns analysis:
From the above data it is evident that even if someone starts an SIP at the peak of the market, then the returns are not significantly adverse.
On the contrary, if one invests and the market tanks subsequently (as in the first example) SIP returns tend to be higher while profits are close to benchmark’s return if the market rises even further (as in the second example).
A person, who entered the market in Jan 2008 at all-time high, still earned a handsome compounded return of 11%, five times that of Nifty.
Whereas, a person who entered the market in Jan. 2015, at all-time high, still made decent returns, albeit a tad lower than the index.
If an investor wants to stay invested in equities then he should be continuing his ongoing SIP as it is likely to fetch better returns if the market corrects. Even if the market rises from here on, the returns are likely to be optimal as elucidated from the above example.
It is pertinent for an investor to ponder whether his choice of the vehicle he adopts for equity as an asset class is providing him the expected return (commensurate to its inherent risk and/or compared to the benchmark) rather than to try and time the market.
To sum up, an investor should not only base his decision of continuing or putting a brake on his SIPs on historical trends, all time peaks, future expectations of index, etc. but should undertake a much more pragmatic view keeping in mind his short-term / long term objectives and current asset allocation.
PS: ICICI Direct and Axis Securities are predicting NIFTY above 16,000 by December 2021as per Crowdwisdom360.