Understanding SIPs: Why timing the market may not matter for long-term investors

Mumbai: Investors often obsess over capturing the month's lows when doing systematic investment plans (SIPs) in equity MF schemes, but timing barely matters. A study by Motilal Oswal Asset Management showed the return difference, irrespective of the date you invest, is minuscule over longer periods. For monthly SIPs done in Nifty 500 index for over 10 years, difference in returns for an investor who puts in money at the highest point of the month versus the lowest point is 1.13%.

"The probability of being lucky and consistently investing at the lowest index value each month is mathematically close to zero," says Pratik Oswal, head, passives, Motilal Oswal AMC. For a 10-year SIP in Nifty 500 index, an investor who consistently managed to end up investing at the lowest point every month earned 15.82%, while one who invested at highest point earned 14.68%.

Agencies

In the short term, however, the strategy of catching the lowest point every month may bear fruit. For instance, in a one-year SIP starting in April 2024, the returns for an investor who managed to invest at the lowest point in the Nifty 500 index were 1.17%. The investor who ended up putting money at the highest point lost 9.9%, a divergence of 11.04%.

"SIPs should go through atleast one market cycle of 5-7 years," says Amol Joshi, founder, Plan Rupee.

As the investment horizon lengthens, this gap starts to fade. By the time it reaches a 5-year SIP, the difference falls to just 3.08%.

The difference in these returns shrinks even more over longer periods. For 15, 20 and 25 years, the return difference narrows down to 0.73%, 0.71% and 0.59%, respectively. Wealth advisors said investors must focus more on investing consistently through SIPs over a longer period rather than trying to catch the bottom. "Time in the market is important as it is impossible for retail investors to time the markets," said Viral Bhatt, founder, Money Mantra.