This Article is From Feb 11, 2018

Mutual Funds: Should You Discontinue SIPs In The Ongoing Bull Market?

When the market has followed a one-way trajectory, i.e. upward, is this advisable to hang on to your SIPs?

Mutual Funds: Should You Discontinue SIPs In The Ongoing Bull Market?

Indian market indices rose nearly 28% in 2017

In the seemingly ever-surging market scenario, the rationale of investing money right now makes more sense than probably a few months later when the market is expected to trade higher. Sensex has already risen 28 per cent from 25,700 in December 2016 to past 33,000 level in a year. Similarly, Nifty rose from 7,800 to 10,300 in less than a year, a growth of over 32 per cent. Optimism about earnings recovery, inflows into mutual funds, the victory of the BJP government in key state elections and a global rally fuelled the surge.

Key reforms like bankruptcy code and GST also lifted the sentiment, drawing scores of retail investors into mutual funds. As per the Sebi data, mutual funds have seen an infusion of Rs. 3.8 lakh crore in first eight months of fiscal 2017 (from April till November), while equity and ELSS alone attracted an impressive inflow of over Rs. 1.2 lakh crore.

Some analysts argue that the market rally is due to a surge of liquidity, and the corporate profitability doesn't justify valuations. At the current level, the Sensex P/E ratio is over 23 while the Nifty's P/E ratio is 26.

Driven by strong participation from retail investors, the number of mutual fund folios has grown by over 95 lakh in the first eight months of the current fiscal to an all-time high of 6.5 crore at November-end 2017, according to data from the Securities and Exchange Board of India (SEBI).

Relevance Of SIPs In A Bull market

SIPs (systematic investment plan) allow investors to stagger their investments over a period of time since the market moves bi-directionally (upward as well as downwards). This means the investors get to invest in the market at low valuation too, maximizing the scope of booking profit via a concept known as "cost averaging".

When markets are simply rising, are SIPs the best way to invest? Won't putting a lumpsum amount work better instead of staggering your investment through SIPs? Some experts, however, reject the claim on the ground that some investors may be hard pressed to cough up a lump sum during the bull market .

"Very rarely would you have the entire investment corpus available to you upfront, unless you received a windfall through a large bonus, sale or property, etc. In such cases if you have a long term horizon, you could look at investing by staggering your investments over the next 3-6 months," said Kaustubh Belapurkar, director, fund research, Morningstar Investment Adviser India.

Mayank Bhatnagar, COO of FinEdge, has a balanced view on the proposition of discontinuing the SIPs in the bull market. He believed that investing in the initial stage of secular bull market is advisable but not very practicable.

"It's definitely more profitable to invest lump sums at the early stages of a secular bull market, very few investors actually muster the courage to do so, as timing the start of a rally is impossible too! Instead, most retail investors end up sitting on the sidelines waiting for the 'perfect moment' to enter equity mutual funds, only to end up missing out on large chunks of potentially profitable market rallies. This is why, in the long run, SIP's work best as they safeguard investors against taking rash, emotional investment decisions that can be extremely detrimental," said Mr Bhatnagar.

Adds Mr Belapurkar: "Equity Markets are never a one-way street. There is bound to be volatility in the short term. This is where the SIPs help in averaging the cost of investments."