Gloom won’t stop India’s growth; Don’t exit SIP

T■ here are reports that the SIP volumes are dropping. This means people are suddenly not buying equities when the prices have fallen. Does it mean that they think the asset class will no longer give them long term returns?

For a moment, let us think that equity as an asset class is dead. It is like saying that all businesses are doomed to closure, that we have stopped earning or spending (or will be in that state soon). We are forecasting that our economy will not grow any more.

If this were to happen, the only thing that would perhaps have some value would be that useless metal named ‘gold’. Prices of gold will be driven by fear and panic when other asset classes have given up.

Eventually, it would become a bubble and then blow out. This is because, the gold we consume comes from overseas. And we need hard currency to pay for it. If the economy is in shambles, imagine where the rupee would be?

Step back a little and see what you are doing to your investments. You are going by the outcome of some market conditions that are possibly new to you. We go through this phase of boom, doom and gloom every few years. What I can say is that if I take a ten-year time frame, not more than three will be ‘terrible’ years. Does not mean that the other seven are great years? But I would think that there are generally more ups than downs in an investment journey.

Also, we have not yet reached that bubble status which Japan was in 1989 or so. The Nikkei Index of 225 Japanese stocks (something like our BSE Sensex) touched a high of near 38916 and then went all the way back to 7,000 odd in 2008 and is now hovering around sub 23,000 levels. Look at that index and long term investing theories go out of the window. This level of excess in the market and then a sluggish economy (with probably among the highest per capita GDP in the world) has not been seen elsewhere. I do not think we are in that space.

India is still a hungry nation. We are hungry for growth, hungry to have more of everything. All this means that our per capita GDP is still a long way from being at a stage where growth is an issue. Yes, we have income disparities, but it does not mean that our economy will stop growing.

The mistake people make is to start their SIPs at the top of a bull run and then shut it when the markets are at their gloomy worst. What it means is that you are condemned to not getting the best out of your investments. You are missing on opportunities to keep adding to your portfolio at lower prices. If you bought a stock at `500 and the price has fallen to `300, with no fundamental change except a cyclical downturn or some issue impacting earnings for a short time, should you be buying more or selling? What will happen is that you will start a fresh SIP once things become very bright and the markets rally a lot from here. Once again, you will find the top.

Choosing a fund house and choosing a product is what you should think about. And today, if you understand the risk in the product, you have the option to invest online, directly.

A direct investment can make a small difference of anything up to one per cent per annum. The one per cent difference can make a small difference every year, and at the end of 10 years, it can be a reasonable sum. In a `5,000 per month SIP, over 10 years, the maturity amount can differ by around `60,000 to `70,000 if there is a one per cent annualised difference.

Yes, there will be starting times or measuring periods that will either show great returns or very poor returns. This is not easy to forecast.

If we have the courage to start our SIP and keep it going in ‘gloomy’ periods, the results will show for itself when the market turns around. What one can do is to throw in additional amounts (in addition to our SIP) when the markets are gloomy. Treat it like some expenditure and buy some more units when things are looking bleak. This will help you also to take off some money (without breaking your SIPs) off the table when things look very expensive and the whole world is chasing stocks. It is like a trade you have made.

Your SIP continues and you made some good money on the side. It can take one to three years to take this gain. Not that you should, but in case you feel worried, this is one way to take some cash off the table and put it back when gloom sets in again.

Investing is a lifetime habit. You do not want to quit good habits. In my next piece, let me talk about ‘selling’ or getting out of the market.

(The writer is a veteran investment adviser. He can be reached at balakrishanr@gmail.com)