Should I stop my mutual fund SIPs when the market is at an all-time high?

Published: January 10, 2021 at 11:06 am

In this article, we study historical Sensex data to determine if investors should stop or pause their mutual fund SIPs when the markets hit an all-time high. We also consider lump sum investments and systematic transfer of a lump sum (STP) during all-time market highs.

Every time the market hits an all-time high, new investors get jittery, particularly those with little equity exposure. We recently discussed who should “book profits: and who should not: Is it time to book profits from mutual funds?

Now we consider investments and the following questions. If we have SIPs running, should we pause them during all-time highs? Of course, distributors would say “don’t” but what does the data show?  If I have a lump sum to invest, should I wait for the market to fall from the all-time high? Can I start an STP when the market is at an all-time high?

We have already discussed that there is not much mathematical difference between a lump sum investment and an STP made during an all-time high. An STP should be only for an emotional or psychological benefit and not for less risk or more returns. In this report, we shall extend this study.

We shall use Sensex price data from inception (April  1979) for this study. Dividends are not included, but since they need to be added to every option we shall consider below, it is unlikely to make a difference in this context. The all-time highs (ATHs) are shown below as red dots. It should be clear that an ATH is a fairly common event.


Sensex closing price in log scale with red dots representing all-time highs
Sensex closing price in log scale with red dots representing all-time highs

Market all-time highs and Lump sum vs STP investment

First, let us consider a ten-year investment of a lump sum. We can invest this in two ways, put it into the market all at once (we will call this lump sum investment) or start an STP. That is investment the amount gradually over a few months (we will use 12 months. We have already established that the STP duration does not matter in the previous study linked above).

Now we consider the following scenarios:

  • A lump sum investment made when the market is at an all-time-high (ATH) vs STP done at an ATH
  • A lump sum investment made when the market is NOT at an all-time-high (ATH) vs STP executed NOT at an ATH

The return differences (lump sum return minus STP return) for both these scenarios is shown below.

10-year Return difference between lump sum investment and STP done over 12 months
10-year Return difference between lump sum investment and STP done over 12 months

The green dots represent investments started at ATH and are fewer in number. If we get used to the clutter of orange dots for a few seconds and then compare the spread between the two, it is clear there is practically no difference between when you started the lump sum or STP. 

Sometimes lump sum did better (positive return difference) and sometimes STP. There is no way to tell which would be better when we start our investments. This is simply a manifestation of the sequence of returns or timing luck.

Conclusion: If you have a lump sum to invest, do not worry whether the market is at an all-time high or not. Just spread the amount over a few months and invest and move on. Do not waste time over “how many months either”. There is no ideal solution here. It is all pot luck.

Market all-time highs and the SIP

Here we shall consider a 15-year SIP and the following scenarios:

(1) Normal SIP (invest in all conditions) vs Paused SIP whenever markets hit ATH. When investment resume, the missed SIP instalments are invested. For example, if an Rs. 1000 SIP was paused for three months, in the fourth month, the total investment is Rs. 4000

We consider 15-year rolling SIp returns. There are 311 such data points in each line shown below. Even by visual inspection, it is clear that pausing a SIP during market ATHs does not matter

311 15-year SIp rolling return data points for paused SIP(when market is at an all-time high with extra investment later(red) and normal SIP (black)
311 15-year SIp rolling return data points for paused SIP(when the market is at an all-time high with extra investment later(red) and normal SIP (black)

Another possibility is to pause the SIP during ATH and not compensate for it later. That is if three-month SIPs instalments are missed the fourth SIP instalment will still be Rs. 1000.

The orange dots below represent Paused SIP return (with no make-up investment) minus normal SIP return.

The blue dots represent Paused SIP return (with additional make-up investments) minus normal SIP return.

Return difference between paused SIP(when market is at an all-time high with extra investment later) and normal SIP (blue) and return difference between paused SIP and normal SIP (orange)
The return difference between paused SIP(when the market is at an all-time high with extra investment later) and normal SIP (blue) and return difference between paused SIP and normal SIP (orange)

Clearly, the spread in the blue dots is significantly lower due to the additional investments made.

Conclusion: There is no benefit in pausing SIPs during market ATHs. In fact, notice most of the blue dots are below zero. Meaning the paused SIP (with make-up) has a lower return than a normal SIP.

Just for academic interest, we consider the opposite situation.

(2) Normal SIP (invest in all conditions) vs Paused SIP whenever markets are not at ATH! When investment resume, the missed SIP instalments are invested. For example, if an Rs. 1000 SIP was paused for three months because the market below ATH, in the fourth month, the total investment is Rs. 4000

In this case, pausing the SIP is of little benefit typically. Even here due to timing luck, the pausing has done at least as well as the normal SIP.

311 15-year SIP rolling return data points for paused SIP(when market is NOT at an all-time high with extra investment later(red) and normal SIP (black)

311 15-year SIP rolling return data points for paused SIP(when the market is NOT at an all-time high with extra investment later(red) and normal SIP (black)We also consider a similar situation as above with similar results.

The orange dots below represent Paused SIP return (when not ATH with no make-up investment) minus normal SIP return.

The blue dots represent Paused SIP return (when not ATH with additional make-up investments) minus normal SIP return.

Return difference between paused SIP(when market is NOT at an all-time high with extra investment later) and normal SIP (blue) and return difference between paused SIP (NOT all-time-high) and normal SIP (orange)
The return difference between paused SIP(when the market is NOT at an all-time high with extra investment later) and normal SIP (blue) and return difference between paused SIP (NOT all-time-high) and normal SIP (orange)

Summary: Market all-time highs are quite common and are not relevant in any way to when you invest. Every moment wasted speculating future market movement is a moment lost forever. There is no concept of notional gain when it comes to time. Please invest as much as possible as early as possible with the right asset allocation strategy. If you need some help, you can start with this free seminar: Basics of portfolio construction: A guide for beginners.

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