Mutual Funds: Why should you continue your SIPs even at the market peak?

These days, the Nifty is reaching new highs, causing investors to feel ecstatic and increasingly optimistic about the profits they anticipate from the stock market. Today, it reached another all-time high. The ongoing surge in prices is clear: Indian financial institutions such as mutual funds and insurance companies have been actively purchasing shares in the Indian stock market, creating steady demand and driving prices upwards.

Furthermore, the recent outcome of the general elections and the establishment of a stable government have bolstered market confidence. This stability is viewed favourably for business continuity and economic policies. After a period of volatility, global markets have demonstrated signs of rebound, with expectations of potential US interest rate hikes reaching their zenith. This optimism is positively influencing the Indian market. Additionally, numerous Indian companies have posted impressive financial results, underscoring a resilient economy and fostering investor confidence in prospective growth.

Yet, this remarkable surge also raises apprehensions of an overheated market, suggesting a potential correction may be imminent. In this heated market, certain investors are uneasy about stretched valuations. Should retail mutual fund investors be concerned about entering this elevated market? Specifically, many are deliberating whether to maintain their systematic investment plan (SIP) contributions despite high mutual fund net asset value (NAV) or if they should wait for a market decline to adjust their SIP strategies accordingly.

Explaining market rise and fall

Investors should recognize that market fluctuations, often perceived as purely positive or negative, carry nuanced implications. A rising market may reflect a robust economy with thriving company growth, potentially stimulating job creation and heightened consumer spending. Such conditions can offer profitable opportunities for investors amid escalating stock prices.

However, a rapid ascent can sometimes signal a bubble, indicating that prices have been inflated beyond a company’s actual value. Such situations often precede sharp corrections in the market. Not all corrections should be perceived negatively. A correction can purge overvalued stocks from the market and present buying opportunities for long-term investors. Additionally, it can incentivize companies to adopt fiscal responsibility measures.

Expecting a crash scenario is futile unless there is a major event that disrupts the global economy, such as heightened geopolitical tensions, a brewing conflict between powerful nations, or an unexpected and unfortunate event like the recent Adani-Hindenburg saga. A substantial decline can disrupt the economy, resulting in job losses and reduced consumer confidence. Investors may also experience shrinking portfolios.

Should you time your SIPs in sync with market movement?

Attempting to synchronize your SIPs with market peaks and troughs is highly risky. Predicting market fluctuations consistently is exceedingly challenging, even for seasoned professionals. Missing out on just a few upticks can markedly affect your investment returns.

Attempting to synchronize your SIPs with market peaks and troughs is highly risky. Predicting market fluctuations consistently is exceedingly challenging, even for seasoned professionals. Missing out on just a few upticks can markedly affect your investment returns. Furthermore, SIPs are designed for long-term wealth accumulation. Market fluctuations tend to average out over extended durations, reducing the importance of timing your investments precisely.

Also, SIP investments can indeed be paused or discontinued altogether, depending on your financial circumstances rather than market timing. For instance, if you face a substantial reduction in income, it may be prudent to temporarily halt your SIP contributions. However, halting SIPs during market peaks and resuming them solely in anticipation of a downturn or crash reflects a careless approach to financial management.

What should SIP investors do?

When the market hits a record high, two scenarios typically unfold: Either the upward trend continues or a correction occurs, leading to a decline in stock prices. A third possibility is the market entering a range-bound phase, which usually follows a brief decline and can persist for some time.

When the market continues its ascent driven by factors such as robust company earnings, favourable economic indicators, or heightened investor confidence, it can evoke excitement among investors. However, it’s crucial to recognize that rapid upward movements may not always be sustainable. Despite this, it shouldn’t discourage individuals from maintaining their SIP investments. What if the market continues to rise before indicating a correction? This could result in missing out on potential opportunities during the waiting period.

During a market decline, there is certainly the potential to acquire more mutual fund units at lower NAVs. However, predicting the extent of the market downturn is highly uncertain. Attempting to purchase units at the absolute lowest NAV is akin to gambling, a strategy even many experts struggle to successfully execute.

Even in a range-bound market scenario, SIP remains effective due to the inherent volatility of equity markets. By consistently investing on a systematic basis each month, investors can leverage rupee cost averaging to smooth out the purchase price of mutual fund units. This strategy can potentially enhance returns over the long-term investment horizon.

SIPs work in all situations

Investing through SIPs is beneficial in all three scenarios, whether the market is rising, falling, or range-bound. During a bull market, SIPs enable participation in growth without the need to time the market. By consistently purchasing units, investors may accumulate more units as prices increase. During a market correction, SIPs utilize rupee-cost averaging effectively. By purchasing more units at lower prices, investors can potentially reduce their average cost per unit and position themselves for improved returns when the market recovers.

However, rupee-cost averaging particularly excels in a sideways market. This strategy involves purchasing more units when prices decline and fewer when they are high, thereby, smoothing out your average cost and positioning you to capitalize on future market movements.

Investing in the market through SIPs promotes discipline, consistency, and long-term investment, making them a potent tool for any investor, regardless of market conditions. SIPs help navigate market volatility and have the potential to build wealth steadily over time. Pausing or stopping SIPs when the market is high disrupts the continuity of investments, hindering the accumulation of your desired corpus over time.