Down market, bear markets, market crashes – whatever you want to call them follow no rules. History is proof that market crashes are inevitable. The reason stock markets have historically returned more than bonds or gold is specifically because they are volatile and crash on occasion. Please note that volatility is the price one must pay to achieve higher returns than are offered in
less volatile assets.
Let’s overview the journey of a midcap fund & how volatility combined with several market crashes has generated superior returns. Edelweiss Midcap Fund (G) was launched in December 2007. Post its launch, global financial crises happened and the NAV of the fund took a toss and went down from 10 to 3.3 in a matter of months. The NAV of the fund as of December 31, 2022
was around 51.36.
Scenario 1: Linear returns from NAV 10 to 51.36
If we consider a hypothetical situation where there are no market crashes and one gets returns similar to a guaranteed scheme: the NAV moves from 10 to 51.36 in 170 months (14.25 years). A SIP of Rs. 1000 would have
generated a total wealth of Rs. 4,23,675 for investors against an investment of Rs. 1,70,000 (IRR of 11.5% p.a.). Quite good considering zero emotional imbalance but this scenario is not possible in the real world.
Scenario 2: Actual returns on this fund
In reality, the fund has performed very well. A SIP of Rs. 1000 has generated a total wealth of Rs. 7,96,163 for investors against an investment of Rs. 1,70,000 (IRR of around 19% per annum). That’s 87% more than
Scenario 1. Historically, there were 4-5 market crashes during this 14-year journey of the fund – providing enough opportunities to buy units at a cheaper NAV during these crashes.
Scenario 3: Increasing your SIP amount whenever market falls by 10%
Instead of fearing the market crash, if one doubles the SIP amount whenever the NAV of fund falls by more than 10% until it reaches back the original NAV, one would have accumulated a total wealth of Rs. 14,48,573 against total investment of Rs. 2,75,000 (IRR of 19.7%). That’s 82% more than scenario 2 (simple SIP of Rs. 1000) and 241% more than scenario 1. In this case, the
SIP amount was doubled from Rs. 1000 to Rs. 2000 for 52 months.
Summary of 3 scenarios
As evident, discontinuing your SIP investments during a bear market is one of the worst mistakes one can make. As the market hits low, resulting in a decline in a fund’s NAV (Net Asset Value), the investor ends up buying more units of the fund at a lower price. Gradually, as the market starts picking, the value of your SIP investments could fetch more returns since you own more units
now.
Therefore, it is highly advisable that you double your SIP investments during a market correction. The rewards won’t be immediate but in the long run, the portfolio value will increase substantially.
Another disaster you should avoid – if you redeem your investments during a bear market, you will convert your unrealized loss into a permanent loss.
