I am 37 and have been investing in the equity market through mutual funds via monthly Systematic Investment Plans (SIPs) from September 2016. The following is the list of equity and balanced funds that I have been investing in: CanRobeco Emerging Equities, DSP BlackRock Small & Midcap, Franklin India High Growth Companies, Kotak Select Focus, Sundaram Select Midcap, Mirae Asset Emerging Bluechip, HDFC Balanced, SBI Balanced Fund. My monthly SIPs total ₹70,000. So, in this rising market where the Sensex is near the 30K mark, should I discontinue my SIPs till the time the Sensex comes down? I won’t be withdrawing the corpus already invested in mutual funds. But should I wait for the market to go down and restart my SIPs? My investment horizon is at least 7-8 years from now or may be even more.

Aditya Nigam

Your question is interesting and unusual. Usually, investors consider stopping or pausing their SIPs when the stock markets fall sharply. That’s a bad move because the very purpose of SIPs is to ensure you average your costs of investing in a volatile asset.

However, you’ve raised the opposite query — whether you should stop SIPs because the markets have risen too much. The idea of staying away from new equity investments when the markets are at a high is no doubt a theoretically sensible one. At 29,500, the Sensex isn’t inexpensive — it trades at a price earnings multiple of 22.5 times trailing earnings, which is higher than its long-term average of 18 times.

But the problem is that actual market peaks are easy to identify only in hindsight. For instance, after hitting a lifetime high of nearly 6,000 points in February 2000, the Sensex corrected sharply all the way down to 2,600 levels by September 2001.

But it did surpass this high once again in January 2004. If an investor had decided to stop new investments or cash out on this occasion, he would have missed out on the biggest bull market of the last two decades.

From its high of over 6,100 points in January 2004, the Sensex rose all the way to 21,000 levels by January 2008. Thus, it is quite difficult for anyone to say at this point whether a correction is around the corner or if earnings will recover sharply to take the Sensex into a higher trajectory.

This is why it isn’t a good idea to stop your SIPs now. If your objective in starting these SIPs was to invest towards a long-term goal, taking a start-stop approach to your SIPs can prevent you from reaching that goal. Let’s assume you stop your SIPs this month, because the market is at a new high. If the market doesn’t correct as you expect and keeps heading higher, you will find it quite difficult to decide when to resume your SIPs.

If the markets correct, that will not make your job any easier either. You will have a tough task deciding whether to restart your SIPs at a 5 per cent market correction, a 10 per cent one or a 15 per cent one! Often times, it is this indecision about when to re-enter the market that makes investors miss out on the big bull markets. What we would suggest instead, if you are worried about valuations, is to de-risk your portfolio by reviewing your choice of funds.

All the equity funds on your shortlist are good ones with a sound performance record. However, of the eight funds, four are mid-cap or small-cap equity funds, two are multi-cap funds and two are balanced funds. Mid-cap or small-cap funds are riskier and can suffer significant downside compared to multi-cap or large-cap funds if markets correct. Therefore, if you are risk-averse, you can consider adding to your SIPs in the two balanced funds (HDFC Balanced and SBI Balanced) and starting a new SIP in Birla Sun Life Frontline Equity Fund. You can pause your SIPs in CanRobeco Emerging Equities, DSP BR Small and Midcap and Sundaram Select Midcap. While this will bring down the risks to your portfolio in the event of a correction, it will also moderate your returns if the bull market rages on. This is why, if you have your eyes on your goals 7-8 years hence and intermittent market swings don’t bother you, it is best to stay the course with the funds you have chosen.

Send your queries to mf@thehindu.co.in

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