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After giving some serious thought to what we have learnt from studying, analysing and writing on mutual funds over the last two decades, we found some insights on mutual fund investing that seem to hold good for all times. Here's the second one.
After watching the bloodbath in the stock market for the last six months, you're probably kicking yourself for taking the plunge into equity mutual funds at the wrong time. But you need to lose sleep over this only if you're a lump-sum investor. If you're an SIP investor, just stay the course with your investments.
Our SIP analysis spanning three market cycles showed that even if an investor kicked off his SIPs in an equity fund at the worst-possible time (a market peak), he usually broke even by the third year. A year-wise breakdown of SIPs across the 217 equity funds showed that investments kicked off when markets were in a bubble territory did post losses for the first two years, as markets melted down. If you go back to the dot-com bubble, of the 745 possible SIPs across equity funds that one could have initiated in 2000 - the height of the bubble - 645 ended up in the red at the end of their first year, but by the end of their second year, half the SIPs had already broken even. By the third year, 82 per cent of those SIP accounts were already earning a positive return and by their fourth year all the SIPs were back in green. The SIPs that started in 2007 reported an even quicker turnaround. By end of 2009, over 60 per cent of those SIPs were in the green and by 2011, 99 per cent of the SIP accounts had made money.
The quick turnaround becomes possible because in a steadily falling market, SIPs do exactly what they're designed to do - they average your purchase costs downwards so that when stock prices bounce back, it's easier for your investments to turn a profit.
To read the other stories in this series, click on the links below.
Four-year SIPs don't disappoint
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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