The equity market has been quite volatile in the last six months. After hitting an all-time high of 62,245 in October 2021, the Sensex has fallen 14.6% as of June 24, 2022. In May 2022 itself, the broad-market index, the BSE 500, was down 6.1%.

With concerns over high inflation, continuation of the Russo-Ukraine war and rising interest rates, the equity market is on a roller-coaster ride.

In such a volatile scenario, is it a good idea to shift your Equity Mutual Fund Systematic Investment Plan (SIP) to safer investment fixed-income products like debt mutual funds, bank fixed deposits, etc.?

Let us understand it with an example.

Suppose you were investing Rs 1 lakh through SIP for the last ten years. Had these investments been made in the BSE 500 index, the value of the investment would have reached Rs 2.4 crore at the current valuation.

Conversely, if you had switched to debt products at a time of market volatility, how would it have affected your portfolio?

For the sake of calculation, assume that whenever the BSE 500 index improves by 5% monthly, you shift your investments to debt mutual funds. Over the past decade, there have been eleven such market corrections.

Shifting SIP investments to debt products as well as providing temporary capital protection also yields poor returns. So here your SIP investment would have increased to just Rs 2.3 crore, which would have been a difference of Rs 9.4 lakh.

On the other hand, sticking with equity mutual fund SIPs, even if the market is down, pays off in the long run. This is because the equity market offers the best annual returns among all asset classes.

Source: BSE data analyzed by Scripbox

Despite all previous corrections, SIPs in the BSE 500 index would have given an estimated 13.4 per cent return in 10 years (from February 2012). Of course, this more or less depends on what kind of mutual funds are and how representative they are of the BSE 500.

Basically, SIP performs the following functions:
Automates disciplined saving and investing
By automating the process, investors have the advantage of not having to worry about short-term market movements and have the convenience of regularly saving and pooling their corpus. Mutual fund SIPs also incidentally take advantage of market volatility when market valuations are low and run-ups are low. Thus, you resort to rupee-cost averaging and take advantage of it.

Optimize potential returns
Since you accumulate more units when the market is down, you also have the opportunity to optimize potential growth – as the market moves upward over the long term and is in line with corporate earnings growth. In the long term, the power of compounding also comes in handy which helps you create more wealth.

Further, shifting of SIPs from equity to debt should be viewed in the context of:

asset allocation
Initially, you need to understand your risk profile and financial goals and then work on the asset allocation mix for your portfolio. If you are shifting more equity mutual fund SIPs to debt mutual funds, your asset allocation strategy will be changed.

Each asset class has its characteristics and role to contribute to your investment portfolio. An asset allocation that does not align with your risk profile and target requirements can mean less achievement of your financial objectives. Since the equity asset class gives higher returns over the long term, shifting mutual fund SIPs to debt for rebalancing may not be desirable.

In the last two years, the equity market has grown significantly. However, if your asset allocation is more skewed towards equity than you would like, it is prudent to allow incremental investments in debt funds.

You need to rebalance your portfolio if:
1. Your risk profile has changed,
2. Your asset allocation has deviated from the desired allocation or
3. The time horizon of your investment has changed.

Similarly, if you need funds in the next 1-2 years for your financial goals or other needs, it is prudent to deploy fresh investments in low risk debt investment options like debt mutual funds, bank fixed deposits etc.

takeaway
The equity market will remain volatile in the short term. The decision to continue SIP in Equity Mutual Funds should be taken in conjunction with your desired asset allocation keeping in mind the long-term outlook and financial objectives. If you have not done financial planning, then it is better that you do this exercise and take help of experts if needed.

(The author is Chief Business Officer of Scripbox – a leading digital wealth manager. Scripbox uses proprietary algorithms to deliver a full stack of wealth management solutions.)