Is turning SIP into a market-timing strategy the right thing for investors? Find out here

For a long-term investor, high market valuations by themselves should not be a reason to stop systematic investment plans (SIPs). The purpose of an SIP is to avoid repeatedly deciding whether today is the right time to invest. Markets can remain expensive for long periods, and waiting for a correction can result in investors sitting on cash while markets continue to rise. Equally, if markets correct after an investor has started or increased an SIP, subsequent instalments buy more units at lower prices. This averaging across different market levels is one of the main benefits of systematic investing.

However, Prashant Mishra, founder and CEO of Agnam Advisors, distinguishes between continuing an existing SIP and increasing it simply because of market conditions. 

“Investors should increase SIPs primarily because their income, savings capacity or financial goals have changed, not because they expect the market to rise further. If equity valuations are uncomfortable, the better response may be to review the overall asset allocation rather than stop investing altogether,” Mishra said.

When should one increase SIP?

According to Prashant Mishra, the increase should ideally be linked to the investor’s financial plan and increase in disposable income. 

“For example, someone investing Rs 25,000 a month who receives an annual salary increment does not necessarily need to keep the SIP unchanged for the next ten years. Increasing the SIP periodically allows the investment programme to grow along with income,” he said.

A 5-10 per cent annual increase in SIP can be a useful planning approach for investors whose income is increasing at a similar or higher rate. However, there is no universal percentage that applies to everyone.

An investor should ask themselves these important questions:

• Has my income increased?

• Has my monthly investable surplus increased?

• Am I falling short of the amount required for my financial goals?

• Is my equity allocation still within the range prescribed in my financial plan?

The decision should come from these factors rather than from whether the Nifty is at a particular level.

Here is an example of the impact of increasing an SIP

Consider an investor investing Rs 25,000 per month for 15 years.

Assuming an illustrative long-term return of 12 per cent per annum:

Scenario 1: SIP remains Rs 25,000 throughout

• Total amount invested: Rs 45 lakh

• Approximate value after 15 years: Rs 1.25 crore

Scenario 2:SIP is increased to Rs.30,000 per month

• Total amount invested: Rs.54 lakh

• Approximate value after 15 years: Rs.1.50 crore

“An additional contribution of Rs 9 lakh over the 15-year period could therefore increase the final corpus by approximately Rs 25 lakh, because the additional investments also get time to compound. The effect becomes even more significant when SIPs are increased gradually with income. If the investor starts with Rs 25,000 per month and increases the SIP by 10 per cent every year, assuming the same illustrative 12 per cent return, the corpus after 15 years could be approximately Rs 2.15 crore,” he explained.

(Please note that these calculations are illustrative; actual market returns will vary and are not guaranteed.)

The key lesson is that an investor’s savings rate and the time those savings have to compound can have a much bigger impact on long-term wealth creation than trying to identify the perfect market entry point.

Biggest mistake – Turning SIP into a market-timing strategy

According to Mishra, investors should avoid stopping SIPs merely because indices have reached new highs, waiting indefinitely for a correction before investing accumulated cash, or shifting aggressively between equity and debt based on short-term market predictions.

“They should also avoid significantly increasing equity investments because of recent strong returns or FOMO (fear of missing out). An SIP increase should come from greater savings capacity and financial goals, not from the belief that recent returns will continue. For long-term investors, the more useful approach is to continue the discipline of investing, increase the amount as income and savings grow and periodically rebalance the portfolio if equity exposure has moved materially above the desired asset allocation,” he said.

Valuations matter when deciding how much of the portfolio to allocate to different asset classes. They are much less useful as a signal for deciding whether this month’s SIP should go in.

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