Sunil Shah is a worried man today. He entered the market in October 2007, when the Sensex was rising by 1,000 points in a single week.
At that time, his already-invested friends advised him to enter the market through systematic investment plans of mutual funds. Since he had never invested in the markets before, he decided to go the whole hog and started four SIPs of Rs 5,000 each.
In the last eight months, he has invested Rs 160,000. However, the erosion in the net asset value of his mutual funds has meant that the value of his invested money has dropped to Rs 120,000. He does not know if continuing with the SIPs makes any sense now.
"In such cases, investors call up to stop their SIPs or exit them. But, we try to convince them as much as possible to the contrary," says a financial planner. And this Monday, when the Sensex slipped by 506 points, Shah did the same. He called his mutual fund distributor to stop his SIPs.
The distributor told him that it does not make sense to do so as he was getting more units of the same fund for the same money.
"So what? My portfolio is already down 25 per cent. This is like throwing good money after bad money," Shah argued.
His fund advisor explained, "When the NAV falls, you are going to get more units of the fund. That means when the market turns around, you will get much more returns."
Suppose the NAV of a fund is Rs 20. When you invest Rs 5,000 in that fund, the total number of units purchased would be 250 (Without considering 2.25 per cent entry load and an annual 2 per cent fund management charge in equity funds).
However, there is no entry load on investors if they approach the asset management company directly.
Now, if the NAV falls to Rs 18, the number of units that can be purchased is 277.7. A further fall to Rs 15 and the number of units in the kitty is 333.3. Let us take Shah's case. If he were to continue his SIPs, the numbers could look something like this.
Suppose, he accumulated 1,500 units in the first six months at the NAV of Rs 20, another 1110.8 for four months at Rs 18 and another 1333.2 units for another four months at Rs 15, the total number of units he got is 3,944.
If the markets were to turn around in, say, six months and the NAV was to rise to Rs 25, his portfolio would be worth Rs 98,600 (on an investment of Rs 70,000).
And the additional 444 units accumulated during the falling market have added Rs 11,100 to the corpus.
Moral of the story: It's a good idea to continue your SIPs in a falling market.
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