Timing A ‘SIP EXIT

Investment is made with the aim of either generating superior returns or achieving your financial goal. Taking into consideration these quantitative and qualitative factors will help you achieve both. The following article provides a guideline about managing your SIP for a fund

The stock market around the world has been on a roller-coaster ride in recent times. On account of the pandemic that has gripped with globe, investors have been witness to sharp downturns in the months of February and March, which also included indices hitting the lower circuit a few times. However, in the month of April, we saw one of the biggest monthly gains of the decade. In the meantime, one of the worst sufferers of this volatility is the SIP investor who has dutifully and religiously remained invested during all this turmoil.


The SIP returns for equity investors in the last three and five years on an average have been negative, except for a few pockets that have generated positive SIP returns. Even in a 10-year period, SIP returns for most of the categories failed to beat the normal bank fixed deposit returns. Investment is all about generating positive returns, if not in a shorter period then definitely over a longer duration. But if even after five years you are staring at negative returns on your investment, there definitely seems to be a need to re-strategize your wealth creation plan.

The Right Timing
Many advertisements and advisors will surely make you believe that SIP in an equity fund is for the long term and it should be allocated towards achieving your long-term goals. The mantra is that it should not be disturbed. However, it is not a theory cast in stone and hence you need to be flexible about SIP and the amount accumulated through such an investment. One of the biggest disadvantages of investing through the SIP route is that you invest a fixed sum of your money into equity markets, irrespective of the position of the markets. Whether the equities are available at higher or lower valuation, you end up investing the same sum of money every month. And so you buy irrespective of market valuation.

Valuation and Returns
It has been proven time and again that the current valuation of the equity market determines the future returns. There are various valuation parameters that are used to draw inferences about the attractiveness of the market and one of the most prominent is the price to earnings (PE) ratio. In addition, price to book value (PBV) and dividend yield (DY) are good proxies to gauge the attractiveness of the equity market. In the case of PE and PBV, a higher value means lower returns going ahead while in the case of DY, lower value means lower returns going ahead.

To understand how valuation impacts future returns, we studied Nifty returns from the start of the year 2008 till the end of April 2020 against the range of market valuation. The following graph shows the return generated by Nifty in one month, three months, six months and one-year time frames along with valuation ratios.

In the graph above, if the PE of Nifty is in the range of 10-15, the average return in the next one month, three months, six months and one year is 3.8 per cent, 22 per cent, 55.4 per cent and 77.4 per cent, respectively. The following graph depicts future returns with respect to PBV and DY.

Since market valuation determines future returns, we can use this to exit from SIP and re-enter to get optimal returns.

Quantitative SIP Exit Strategy
We will use only the PE ratio to time SIP exit and re-enter as this data is easily available on stock exchange sites and you can adopt with a few vigilances. Here are the steps that you must follow:

1. Calculate the 200 and 50-day simple moving average (SMA) of the PE ratio.
2. Whenever the 50-day SMA is greater than the 200-day SMA, enter the market, but if the 50-day SMA is lower than the 200-day SMA, stay away from the market.
3. Only the accumulated amount under SIP should be exited and put into a money market or liquid fund. Normal SIP should be allowed to continue.

As they say, the proof of the pudding lies in its eating and so we will illustrate this process to understand if it is profitable. For this sake, we have taken the Nippon India Large-Cap Fund (growth plan and growth option) and SIP investment into the fund for five years ending April 2020. We have assumed that you have chosen the first day of every month to invest Rs1,000 in the fund. Therefore, over five years you will have invested Rs 60,000 and the current value of your investment will beRs57,578. It means your annualised return is negative at 1.6 per cent. The investment in the fund is not even able to save your principal.

The story, however, would have been different if you would have been more active in managing the accumulated SIPs. Now we will apply our simple strategy and understand how the result differs. SIP was started in the month of May 2015 when the 200-day SMA of Nifty PE was lower than the 50-day SMA of Nifty PE. The first time after the start of your investment, the 50-day SMA of Nifty became lesser than the 200-day SMA of Nifty PE on September 30, 2015. Till this time the total accumulation of units was 207.85 and the NAV on October 1, 2015, was 23.0176 at which you exit all the accumulated units. The total amount you will receive is Rs4,736.36 after accounting for 1 per cent exit load. This is invested in a money market fund that is generating a return of 5 per cent.

On May 31, 2016, the 50-day SMA of Nifty PE once again is greater than the 200-day SMA of Nifty PE, which is a signal to enter the market. Now you will invest Rs4,893 (Rs4,736.36 has grown at a rate of 5 per cent in the money market fund) and purchase 213.36 units of the fund. Therefore, you have a total of 568 units (355 units having been accumulated through your monthly SIP investment in the fund between October 2015 and May 2016 + 213 units). The next time you get an exit signal is on December 16, 2016. Now you have a total of 852.023 units (the earlier 568 units and 283 units accumulated through SIP between June 2016 and December 2016), which is again invested in a money market fund. You wait till the Nifty PE once again provides an indication to enter the market. Meanwhile, your investment through SIP is continued.

Repeating the above process, at the end of April 2020 your investment value would have been Rs63,000, which is 9 per cent higher than the corpus accumulated through normal SIP. The annualised rate comes to around 0.89 per cent. The Nifty in the same period is up by 13 per cent or annualised at around 3 per cent. Nonetheless, both are not comparable as Nifty return does not include any expense that you bear while investing, as for example, expense ratio. Hence, this simple strategy is able to beat the benchmark as well.



Besides the advantage of better returns, this strategy also comes with lower risk as your drawdown is limited. This also helps you to keep booking profits at intervals and hence automatically helps to harvest your capital gain tax. The strategy also helps you to achieve the cardinal principle of making returns – buy low and sell high.

In addition to the quantitative factor, there are other factors too which should prompt you to exit from your fund’s SIP. Consistent underperformance compared to its peers and benchmark is a warning signal. If the fundamental attribute of the fund has changed and does not suit your risk profile, you should consider terminating your SIP from the fund. If your fund is in the media for all the wrong reasons, that is another reason to exit from the SIP.