Which is better, starting SIP at the top or bottom?

Over the years, SIP (systematic investment plan), a feature offered by mutual funds, has become a household name. With growing interest in it, a few obvious questions come to an investor's mind. This study attempts to address one such commonly asked question about SIPs, backed by long-term data on market indices. It aims to provide readers with a holistic picture so they can make better-informed investment decisions.

First, let's accept that it is impossible to consistently predict the exact top or bottom of a market cycle. At best, one can create and follow a valuation checklist whenever one deviates from their strategic asset allocation, which should help investors reduce portfolio-level volatility to some extent while participating in the equity market.

But still, let's assume one has some magical power, can predict the exact top and bottom of the market and wants to start a long-term SIP. So, should that investor start SIP at the top of the cycle or the bottom? We did a detailed analysis using long-period data of BSE Sensex TRI (last 27+ years). We considered all those periods when the equity market fell more than 20 per cent from its top. The table 'The 'Cost of Delay' of starting SIP late can be huge over the long term' below summarises the investments made by two investors, one who started a Rs 10,000 monthly SIP at the top of various market cycles and the other at the bottom.

How you should read the table

For example, if someone had started a monthly SIP of Rs 10,000 in BSE Sensex TRI during January 2008 (at the peak of market cycle six as per the table), then, as of July 31, 2024, they would have invested Rs 19.9 lakh and the current value of this investment would have been Rs 74.7 lakh at an XIRR (extended internal rate of return) of 14.4 per cent.

Similarly, if somebody had started this SIP in March 2009 (at the bottom of market cycle six as per the table), then they would have invested Rs 18.5 lakh (i.e., Rs 1.4 lakh less than the earlier investor) as of July 31, 2024 and the current value of the investment would have been Rs 63.8 lakh (i.e., Rs 10.9 lakh less than the earlier investor) at an XIRR of 14.7 per cent.

Some findings

1. It is interesting to note that while the percentage return is marginally higher for SIPs started at the bottom of the market cycle, the absolute gain in rupee term (i.e., wealth creation) is far higher for SIPs that began at the top.

2. The 'Cost of Delay' of starting SIPs late can be huge over the long term. The longer the market takes to reach the bottom, the higher the 'Cost of Delay', keeping all other things constant.

3. Even the marginal difference of percentage return goes away over the long term, irrespective of whether you started at the top or bottom (refer to the return difference for SIPs during the first six market cycles, i.e. in the long term).

Moral of the story: The biggest risk is not the market, but missing out on compounding over time.

Manuj Jain, a CFA charterholder, is an Associate Director and Co-Head of Product and Strategies at WhiteOak Capital Asset Management Company. He has been with the company for over two years and has over 15 years of experience in asset management. Part of the WhiteOak Capital Group, WhiteOak Capital Asset Management Company is the sponsoring entity of WhiteOak Capital Mutual Fund.