When markets crash, your first instinct may be to worry about your SIP investments. Watching your portfolio value fall can feel unsettling, and you may even wonder whether continuing your monthly investments makes sense. But what if a market decline that causes anxiety today could become one of the biggest reasons your SIP delivers stronger long-term returns?
If you invest through a Systematic Investment Plan (SIP), a market crash can work differently for you than it does for a lump-sum investor. While falling markets may temporarily reduce the value of your existing investments, they also allow your future SIP instalments to buy more mutual fund units at lower prices.
In simple terms, every rupee you invest during a downturn can potentially purchase a larger share of the market than it could during a bull run.
This is where the power of SIP investing and XIRR returns comes into play. XIRR, which measures the annualised return on investments made at different points in time, often rewards investors who stay disciplined during volatile periods.
The units accumulated at depressed prices during a market crash can generate substantial gains when markets eventually recover, boosting the overall return on your SIP journey.
So, while market crashes may test your patience, they can also quietly lay the foundation for better long-term SIP performance.
How do investors often panic when markets fall sharply?
Market corrections often create fear among investors, as during market declines, portfolios tend to undergo negative or flat returns for a period. As the portfolio goes down, it is common among investors to pause or stop their SIPs.
But one should consider that market correction is a part of investing, and investors should consider a market crash as an opportunity to enhance their long-term returns.
During a market fall, SIP investing will help investors to buy more units in their portfolio at lower prices, and once the markets recover, such investments realize greater returns on their portfolio value due to better cost averaging.
What is XIRR, and why SIP investors should track it
Many investors are often familiar with the CAGR to measure their investment performance, but it has certain limitations, as it can only measure the annualized return of a lump sum investment made on a single date and held for a specific period.
When it comes to SIP, investing is different as investments are made at different regular time lines, it can be weekly, monthly, or quarterly, as each installment gets invested on a different date and remains invested for a different duration. CAGR cannot accurately capture the performance of SIP investments.
This is where XIRR becomes more relevant for SIP investors, unlike CAGR, XIRR considers every cash flow separately, including the amount invested and the exact date of each SIP installment, and it calculates the return by taking into account the varying holding periods of all investments.
Therefore, SIP investors should focus on tracking XIRR to measure the accurate performance of the portfolio.
The SIP advantage during a market crash and rupee-cost averaging
One of the biggest advantages of SIP investing is that it allows for investing a fixed amount at regular intervals regardless of market conditions.
During a market downturn, the NAV of mutual fund units will decline, which may temporarily fall in portfolio value, but it allows investors to accumulate a larger number of units with the same investment amount.
This rupee cost averaging process helps to reduce the average purchase cost of investment, and when markets eventually recover, the units accumulated during the correction help to generate more substantial gains and often become the largest contributors to overall portfolio returns.
Illustrative example: Rs 10,000 SIP before, during, and after a crash
For instance, let’s consider two investors who start doing a SIP of Rs 10,000 per month. Both begin investing before a market correction.
The only difference is that Investor A continues the SIP throughout the market crash, while Investor B stops investing during the correction and resumes only after the markets recover.
Jasmeet Singh, Executive Director, Anand Rathi Wealth Ltd says let’s assume 3 market phases during the bull market phase, the fund’s NAV rises from Rs 100 to Rs 120, followed by a market correction, where the NAV declines from Rs 120 to Rs 70, a fall of 42% and subsequently, during the recovery phase, the market rebounds and the NAV recovers from Rs 70 to Rs 140, surpassing its previous peak.
| Phase (6 Months Each) | Average NAV (Rs) | Investor A SIP Investment | Units Purchased (A) | Investor B SIP Investment | Units Purchased (B) |
| Bull Market | 110 | Rs 60,000 | 545.45 | Rs 60,000 | 545.45 |
| Market Correction | 80 | Rs 60,000 | 750 | Rs 0 | 0 |
| Recovery Phase | 120 | Rs 60,000 | 500 | Rs 60,000 | 500 |
| Total | Rs 1,80,000 | 1,795.45 | Rs 1,20,000 | 1,045.45 |
Investor A continued investing during the 6-month market correction when NAVs were significantly lower, and this allowed the investor to accumulate 1,795 units at an average cost of Rs 100.25 per unit. As the market recovered to a new high with an NAV of Rs 140, these low-cost units generated substantial gains, resulting in a portfolio value of Rs 2.51 lakh with an 49% XIRR. Whereas Investor B has stopped SIPs during the correction and missed the opportunity to buy units at attractive valuations.
Consequently, the investor accumulated only 1,045 units at a higher average cost of Rs 114.78 per unit. Although the portfolio participated in the recovery, the absence of investments during the most rewarding phase of the market cycle limited wealth creation, resulting in a portfolio value of Rs 1.46 lakh and a lower 27% XIRR.
It indicates that while falling markets may temporarily hurt the portfolio values, continuing SIPs during downturns helps investors to accumulate more units at lower prices, and when markets eventually recover, these additional units significantly improve portfolio value and XIRR.
Why short-term XIRR may look worse before it looks better?
The most common and biggest mistake that SIP investors often make is evaluating their investments based on short-term performance, especially during market corrections, as when markets fall sharply, SIP portfolios often show weak or even negative XIRRs, as most recent investments will go into a temporary loss.
However, one should understand that it is a part of SIP investing, and it is called the J-curve effect.
“During a market downturn, the portfolio’s XIRR typically declines as existing investments lose value, and at the same time, new SIP installments are deployed at lower NAVs, but the benefit of these purchases won’t reflect immediately as markets are yet to enter the recovery phase. Once markets start stabilizing and eventually recover, the low-cost units accumulated during the downturn begin generating higher returns, and XIRR starts improving sharply, often rewarding investors who remained disciplined during the downturn,” said Jasmeet Singh.
Thus, a temporary decline in SIP XIRR should not be viewed as a failure of the strategy but rather as a phase before stronger long-term returns.
Who benefits the most from crash-driven SIP investing?
Investing in SIPs during market corrections won’t offer similar benefits across all types of investors, for investors with longer investment horizons will get more benefits as they have sufficient time to accumulate units at lower NAVs and benefit from eventual market recovery, according to Jasmeet Singh.
For instance, investors with a 15 to 20 year investment horizon for long-term goals such as retirement planning, children’s higher education, or wealth creation are likely to benefit as market corrections during this period allow them to accumulate more units at lower prices and help to enhance long-term returns and XIRR when markets recover.
However, investors with short-term goals may not get the same advantage as the funds required within 1 or 2 years, so there will not be enough time for markets to recover, and this limits the benefits of crash-driven SIP investing.
What should investors do during sharp market declines to maximize long-term SIP returns and XIRR, and what are the biggest mistakes that hurt SIP performance?
During the market corrections, investors should aim to continue their SIPs as lower NAVs help to accumulate more units with the same capital, which can significantly enhance long-term return outcomes once markets recover.
Additionally, Investors with surplus cash flows with long investment horizons can consider increasing SIP amounts or doing a top-up SIP to create a more substantial corpus in the long-term.
On the other hand, the biggest mistakes that hurt SIP performance are stopping/redeeming SIPs during market falls due to short-term fear; these actions can prevent investors from benefiting from market recoveries and impact overall wealth creation potential.
Disclaimer: This article is for informational purposes only and should not be construed as investment advice. Mutual fund investments are subject to market risks. Please read all scheme-related documents carefully before investing.
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