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

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.”