The SIP Paradox: Does it really matter to your returns if you initiated your SIP at the top of bottom of a market cycle?

Despite common belief that investing at market bottoms leads to better returns, the study found that those that invested at the peak often outperformed in absolute wealth creation.

You might have heard a zillion times that “time in the market is more important than timing the market” but a latest report by ValueMetrics, an investment firm, demonstrates this by comparing investments initiated at market tops and bottoms through Systematic Investment Plans (SIPs). The report notes that the loss of potential gains by waiting for an ideal entry point could often outweigh the benefits of precise market timing.

Value Metrics analysed historical data of Nifty Smallcap 250 Index over the past 20 years to identify market cycles when the index fell by more than 15 percent. The study compared two hypothetical investors - one who begins investing at market peaks, and another one who waits for a downturn before starting SIP. The report notes that while those that invested at the bottom achieved slightly higher percentage returns, those that invested at the peak benefited from a longer investment tenure, compounding his wealth over time.

In other words, contrary to the common belief that investing during market bottoms leads to better returns, the ValueMetrics study found that those who started investment at the peak often outperformed in absolute wealth creation. On the other hand, those who invested at the bottom achieved similar or slightly higher percentage returns.

For example, during the market cycle of September 2005 to October 2005 when the market corrected by around 18 percent, if an investor had invested when the index was at its peak of 1579, the XIRR returns of the SIP would be around 14.7 percent. On the other hand, an investor who invested at the bottom, which was 1320, the returns would have been around 14.8 percent. Similarly, during the market cycle of February 2007 and March 2007 when the markets corrected around 17 percent, the XIRR returns for investors in the peak, the XIRR was around 15 percent against 15.1 percent for those investing in the bottom. While there have been some period where the SIP XIRR returns percentage was nearly 3 percent higher for those investing in the bottom, such as January 2018 and March 2018, the report notes that this comes due to longer period of correction. The report defended this by saying, “hence an investor who had invested when the market was at the peak, would gain more in absolute returns in hand.”

Manuj Jain, co-founder at ValueMatrics Technologies adds, "If you are a genuine long-term SIP investor, you don’t need to worry about market peaks and bottoms when starting your SIP journey. Instead, your focus should be on your exit strategy as you approach your financial goals. Starting long term SIP at expensive valuations (near market peak) can make the initial experience challenging, but early investing leads to better compounding and higher wealth creation opportunities over time for genuine long term SIPs."

However, not everyone agrees. The limitations of this analysis, an expert pointed out, is that absolute wealth is an incorrect number to focus on, as it prevents like-to-like comparison. For both data points -- SIPS initiated at the top as well as the bottom -- must be calculated based on percentage returns the two strategies yield. In this regard, the study also fails to capture a potential fixed-income return that is likely to be earned by an investor as he/she waits for a correction. The waiting period for a correction can not be counted as a zero-return period, the expert said.

This report comes at a time when there is there an ongoing debate about investing via SIPs in times of market volatility. Data from the Association of Mutual Funds in India (AMFI) has shown that the SIP stoppage ratio – the percentage of discontinued account compared to new registrations - has been steadily rising over the last one year. During February, the ratio rose to 122 percent from 109 percent in January, while the metric was a little under 83 percent in December 2024.

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