The equity market has been quite volatile in the last six months. After reaching a lifetime high of 62,245 in Oct 2021, the bellwether index, the Sensex has fallen 14.6% as of June 24th, 2022. In May 2022 itself, the broad-market index, BSE 500, was down 6.1%.
With worries over high inflation, the continuation of the Russia-Ukraine war and rising interest rates, the equity market is on a roller-coaster ride.
In a volatile scenario like this, is it a good idea to shift your equity mutual fund Systematic Investment Plans (SIPs) to safe-haven fixed-income products such as debt mutual funds, bank fixed deposits etc.?
Let's understand this using an example.
Let's suppose you were investing Rs 1 lakh via a SIP for the last ten years. If these investments were made in the BSE 500 index, the value of the investments would have reached Rs 2.4 crore at current valuations.
In contrast, how would it have affected your portfolio if you had switched to debt products whenever markets were volatile?
For the sake of the calculation, let's assume that whenever there is a 5% monthly correction in the BSE 500 index, you shift your investment into a debt mutual fund. In the last decade, there have been eleven such market corrections.
Shifting SIP investments to debt products while temporarily providing capital protection also results in poor yields. That's why here, your SIP investments would have grown to only Rs 2.3 crore, a difference of Rs 9.4 lakh.
On the other hand, persisting with equity mutual fund SIPs, even if markets are down, pays off over the long term. This is because the equity market provides the best annualised returns among all asset classes.
| Top corrections in BSE 500 index in the last 10 years | |
| Month | (in %) |
| May-12 | -6.2 |
| Feb-13 | -6.5 |
| Aug-15 | -6.2 |
| Jan-16 | -5.8 |
| Feb-16 | -8.1 |
| Nov-16 | -5.8 |
| Sep-18 | -8.8 |
| Jul-19 | -6.3 |
| Feb-20 | -6.5 |
| Mar-20 | -24.1 |
| May-22 | -6.1 |
Source: BSE data analysed by Scripbox
Despite all the past corrections, SIPs in the BSE 500 index would have given an estimated 13.4% returns over 10 years (since Feb 2012). Of course, this would be more or less, depending on the kind of mutual funds and how representative they were of the BSE 500.
Fundamentally, SIP does the following:
Automates disciplined saving and investing
By automating the process, investors benefit from the convenience of not having to worry about short-term market movements and keep saving regularly and accumulating their corpus. Mutual fund SIPs also incidentally take advantage of market volatility by buying more index/units when market valuation is lower and less when it has run-up. Thus, you resort to rupee-cost averaging and reap its benefits.
Optimise potential returns
Since you accumulate more units when the market is down, you also get an opportunity to optimise potential growth - since the market tends to move upward over the long-term and in tune with the corporate earnings growth. Over the long-term, the power of compounding also comes into play which helps you create more wealth.
Moreover, shifting SIPs from equity to debt should be seen in the context of the following:
Asset allocation
Initially, you have to understand your risk profile and financial goals and then work out the asset allocation mix for your portfolio. If you are shifting more equity mutual fund SIPs towards debt mutual funds, then your asset allocation strategy would be tweaked.
Every asset class has characteristics and a role to contribute in your investment portfolio. An asset allocation that is not aligned with your risk profile and goal requirements may mean underachievement of your financial objectives. As the equity asset class delivers higher returns in the long-term, shifting mutual fund SIPs towards debt might not be desirable for rebalancing.
Over the last two years, the equity market has risen substantially. However, if your asset allocation is more skewed towards equities than what you wish to maintain, it makes sense to allow incremental investments into debt funds.
You need to rebalance your portfolio if:
1. your risk profile has changed,
2. your asset allocation has deviated from desired allocation or
3. your investment time horizon is changed.
In the same way, if you need money in the next 1-2 years for your financial goal or other needs, it is prudent to deploy new investments into low-risk debt investment options like debt mutual funds, bank fixed deposits etc.
Takeaways
Equity markets will remain volatile in the short term. The decision about continuing with SIPs in equity mutual funds should be taken in conjunction with your desired asset allocation with long-term outlook and keeping financial objectives in mind. If you have not done financial planning, then it is best to go through this exercise and take help from experts whenever required.
(The writer is Chief Business Officer, Scripbox - a leading digital wealth manager. Scripbox uses proprietary algorithms to deliver a full stack of wealth management solutions.)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
