The monsoon has begun in right earnest. In fact it is raining ‘exits’!! On June 23, 2016, the United Kingdom or Great Britain decided to ‘exit’ the European Union (EU) through a referendum (vote) for which the acronym ‘Brexit’ was coined. The UK vote to exit the EU led to some panic selling in the market and global equity indices declined while currencies too bore an impact. This was mainly due to uncertainty over the exact repercussions of ‘Brexit’ as the results were somewhat on unexpected lines. A week before this, the RBI Governor Raghuram Rajan announced that he is ‘exiting’ (demitting) his office in September 2016 to pursue his academic career overseas. On the lines of ‘Brexit’, this was acronymed as ‘Rexit’.

What should a retail investor do in such a situation? Here is an apt quote from the legendary value investor Sir John Templeton, “To buy when others are despondently selling and to sell when others are avidly buying requires the greatest fortitude and pays the greatest ultimate rewards.” These powerful lines surely help to resolve an investor’s dilemma when markets fall. Let us also look at an example to re-iterate this fact.

Example - Rohit had enrolled for a 10-year SIP of the CRISIL-AMFI Equity Fund Index* (a representative index for equity mutual funds) from March 2006 to March 2016 @ Rs.10,000 per month. However, Rohit opted out of the SIP in March 2009 in panic after the markets crashed in 2008. He collected Rs.2.67 lakhs (-18.40% annualised returns) after 3 years on a principal of Rs.3.60 lakhs (Rs.10,000 per month for 3 years from April 2006-March 2009). In fact, he heaved a sigh of relief that he was able to control further losses.

But alas, he was wrong. Mohan who continued for the entire 10-year period made significant gains and earned Rs.22.42 lakhs (12% annualised returns) on a principal of Rs.12 lakhs (Rs.10,000 per month for 10 years). Thus the 10-year SIP gave an absolute return of Rs.10.42 lakhs (Rs.22.42 lakh –Rs.12 lakh). Rohit clearly missed out on the exponential gains made during the subsequent period of 7 years had he not opted out in March 2009. Hence one must never discontinue a SIP when the market is on a downturn.

For a SIP of Rs.10,000 per month in the CRISIL-AMFI Equity Fund Index
Source – CRISIL Mutual Fund Research Tool
Past performance may or may not be sustained in future. This is only for illustration purposes.

The example clearly shows that a SIP is in an acceleration mode when the markets are weak as it buys more units when the NAV is lower (and less units when the NAV is higher). This is also called ‘Rupee Cost Averaging’. Thus as mentioned by Sir John Templeton, a market decline is a good opportunity to buy more mutual fund units (via SIPs). It is also important that investors continue their SIPs across multiple market cycles to create wealth in the long run as seen in the above example. So whether it is ‘Rexit’ or ‘Brexit’, do not exit your SIPs but stay invested for the long haul.

* The index is only used for illustration. One cannot actually invest in the index but can invest in a fund that is part of the index. For more details on the index refer -  https://www.crisil.com/capital-markets/crisil-amfi-equity-fund-performance-index.html

Information contained in this article is not a complete representation of every material fact and is for informational purposes only. The recipient is advised to consult its advisor/ tax consultant prior to arriving at any investment decision.