Market Crashes Are the Best Opportunities to Invest

The recent market downturn has left many investors shaken. To bring you up-to-date, S&P BSE Sensex, the most commonly used market indicator, has registered a sharp decline of 10% since August 3rd. There was a close to 6% fall in a single day on August 24th.

To many this might be reminiscent of the 2008 market crash. Some of you might have had a not-so-memorable experience of investing in mutual funds at that time with investments’ value going down by over 50%. However, many fail to understand that the fall in investments may not just be due to the crash but also due to your decisions during and before the fall, such as:

• You invested a lump sum and pulled out your funds when markets were still down
• You  invested in the wrong kind of funds
• You invested through systematic investment plan (SIPs) or lump sum for a short-period of time that is 1-2 years.

A simple solution to insulate yourself from such unpredictable market behavior is to invest through systematic investment plan (SIPs), wherein market downturns will help you grow your wealth over the long term.

You want to know how? Continue reading …

You will accumulate more units during market falls through SIP

When you do an SIP, you invest a fixed sum regularly over a period, irrespective of the market levels. So, when the market goes down you will automatically buy more units and vice versa. Let’s see how you would have benefitted by investing Rs 5000 on 10th of every month in an SIP in Franklin India Bluechip fund in 2007 and 2008. The table below shows the number of units you could have accumulated during this time. In 2007, you would have accumulated 418 units as NAV of the fund appreciated from Rs 126.64 in January to Rs 190.19 in December. In 2008, as the NAV went down from Rs 195.05 in January 2008 to Rs 99.62 in December, you would have collected 445 units.

SIP investment in Franklin India Bluechip

The returns will be higher when markets bounce back in case of SIP

SIP gives you the benefit of rupee cost averaging. During falling markets you buy units at lower prices and vice versa. Therefore, it averages out the cost of purchase as you spread your investments over a longer period. The average cost per unit of buying Franklin India Bluechip fund was Rs 146 in 2007 while it was Rs 139 in 2008. As cost of purchase goes down you gain more when market recovers.

In case of lump sum, your gains can be higher if you are able to perfectly time the market, i.e., buying at the lowest point and selling at the peak. But that is almost impossible to do.

You don’t have to indulge in the futile exercise of timing the market correctly in case of SIP. Even if you start investing at the worst of times (that is when markets are at their peak), SIP returns won’t disappoint you.

The 5-year return (CAGR) on lump sum investments done at the peak of the market in January 2008 in Franklin India Bluechip was just 4.26% while SIP gains were much higher at 13.81% (IRR).

You won’t lose money over long term

Above all, whether you invest through lump sum or SIP, the chances of losing money over the long term is close to zero. The graph below shows that if you invested through lump sum or SIP for 5 years, you would have never lost money in the past 10 years.

5-year SIP and lump sum investment returns 

(SIP returns are IRR return while Lump sum return is CAGR,)

So, use this market crash as an opportunity.

If you are an existing investor, increase your investments in equity funds through SIP. If you have yet to start your investments in mutual funds, now is the best time: START INVESTING TODAY!