Should you wait for markets to correct before starting an SIP?

While waiting for markets to correct may seem intuitively right and it’s quite possible that starting an SIP at the bottom of the cycle can result in higher returns, does waiting on the sidelines add value to your portfolio? We take a closer look at few instances of SIPs started before market correction and see how they fared.

Global Financial Crisis

Background - NIFTY Mid Cap 150 TRI had rallied by ~60% between Aug’2007 and Jan’2008 in spite of mounting concerns around US and Europe’s financial sector in 2007.
Investor’s dilemma – Whether to start an SIP or wait on the sidelines for clarity to merge on the impending global financial crisis (GFC).
What the numbers say? – While fears of correction eventually proved true and NIFTYMid Cap 150 TRI corrected by ~70% between Jan’2008 and Nov’2008, who would have been better off? An investor starting an SIP near the market peak or the one who anticipated the correction, avoided investing and started an SIP after the market bottomed.

Should you wait for markets to correct before starting an SIP?

As can be seen from table above, whether an investor started an SIP near the GFC peak or GFC bottom, an investment in HDFC Mid-Cap Opportunities Fund would have yielded robust returns (21.9% and 22.3% CAGR respectively). Also, over the long term, it didn't really matter when investors started the SIP; as long as they started one and persisted with it. If at all anything, the delay on account of waiting for the bottom and starting the SIP later would have resulted in less wealth creation to the tune of ~20 lakh (~ 163 Lakhs vs ~143 Lakhs). In contrast, invested amount would have been lower by only 1 lakh (20.1 Lakhs vs 19.1 Lakhs or 10,000*10 installments).

2017 Small Cap Rally and Correction

Background - BSE 250 Small Cap Index TRI had rallied by 57% in 2017. At the end of 2017, Small- Cap Index was trading at a premium of ~50% to its 5-year average.
Investor’s dilemma - Whether to start an SIP or not? Investor A started an SIP of Rs 10,000 in HDFC Small Cap Fund in Jan’2018 ignoring the expensive valuation and the sharp trailing outperformance. Another investor, say Investor B, waited for another year and started an SIP in Jan’2019 after the BSE 250 Small Cap Index corrected by ~24%. How differently would they have fared till date?
What the numbers say?

While Investor B who started SIP after correction i.e. in Jan’2019 ended up with higher returns (31.9% CAGR vs 27.9% CAGR), waiting for correction and not investing earlier meant that Investor B’s absolute profit was lower than that of Investor A, who started the SIP at expensive valuation and close to market peak. In spite of lower returns in %age terms, Investor A ended up with additional profits of Rs 2.6 lakhs for an additional investment of 1.2 Lakhs, owing to the power of compounding.

SUMMARY

Investors need not worry about market levels/valuations as long as they are taking the SIP approach.
Starting the SIP and more importantly persisting with it is more important than when you start it.
Staying invested for long term can help to compound wealth, irrespective of intermittent market volatility.

HDFC Mid-Cap Opportunities Fund

SIP Performance - Regular Plan - Growth Option

An SIP since inception of ₹10,000 invested systematically on the first business day of every month (total investment ₹20.80 lakh) in HDFC Mid-Cap Opportunities Fund would have grown to ₹1.75 crores by September 30, 2024. (refer below table).

Assuming ₹10,000 invested systematically on the first Business Day of every month over a period of time. CAGR returns are computed after accounting for the cash flow by using XIRR method (investment internal rate of return) for Regular Plan - Growth Option. The above investment simulation is for illustrative purposes only and should not be construed as a promise on minimum returns and safeguard of capital. *Inception Date: June 25, 2007.

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HDFC Small Cap Fund

SIP Performance - Regular Plan - Growth Option

SIP since inception of ₹10,000 invested systematically on the first business day of every month (total investment ₹19.80 lakh) in HDFC Small Cap Fund would have grown to ₹1.30 crore by September 30, 2024 (refer below table).