When is the Best Time to Start an SIP ?

Is it prudent to wait for a bottom? Or should you start during the crash? These are some questions which we will try to cover in today’s article. We did some analysis on starting an SIP during the times of market crash. For this, we have taken the market crashes of 2000-2001 popularly known as “Dot-com bubble” and 2008 Global Financial Crisis.

We assumed an investor is looking to start an SIP of Rs. 5,000 for 10 years in BSE Sensex sometime during both the previous stock market crashes. The graph below plots the average returns an investor would earn at the end of the 10-year period if he had started his SIPs at a given point during the crash.

2000-2001

Lets say, the investor had started his SIP when the markets were at the top with levels of 6151 (BSE Sensex). At the end of year 10 the value of their investment would have been Rs. 16.4 Lakhs at a return of 19.04%.

On the other hand, if one had managed to time the market to perfection and started a monthly SIP at the bottom when Sensex was at 2595, astonishingly, the value of their investment at the end of 10 years would have been Rs. 14.4 Lakhs at 16.69%. So investing at the bottom does not guarantee you the highest return in the times of crash. Along with investing at the tops and bottoms, we also analysed the result of investing in 10-year SIPs starting at different points of time during the crash. This includes falls of 20%,30%, 40% and 50% from the top.

As one can see, the best case scenario would have been an SIP starting when the markets had fallen 40% from the top which would have fetched an investor ending value of Rs. 19.35 lakhs with a handsome return of 22%. Even in the worst case , if the investor had started his investments at the levels of 50% downfall he would have made an average return of approximately 16%.

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2008

If an investor had started a similar SIP when the markets were at the top (BSE Sensex @ 21207) in 2008, at the end of the 10-year period the value of the investments would have been Rs. 10.73 Lakhs at a return of 11.18%. Elseways, If the investor had managed to find the bottom (like most investors try to), his Rs. 5,000 SIP would have been transformed to ~Rs. 10.06 Lakhs at 9.97%.

The best case scenario would have been when the investor starts an SIP at the level of 20% fall from the top, making him Rs. 11.15 lakhs at the end of the 10 year period with a return of 11.90%.

Other Falls

We also took a list of all falls exceeding 20% in the previous 2 decades. In this case we assumed that the investor has a relatively shorter investment time horizon of 5 years. The table below shows the results.

CONCLUSION

In conclusion, starting an SIP at the peak performed better than starting it at the bottom in most cases. However, the best performance would have been starting the SIP somewhere during the crash as inferred from this analysis. So an investor need not find the bottom before starting the SIP , he can get even better returns even if he invests during the crash. Over a long period, SIP can offer good returns on the money invested because of the Rupee Cost Averaging which lets to average out the cost of units and hence lessens the effect of short term market fluctuations and crashes.

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