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Bull Phase or Bear Phase: When Should You Start an SIP?

13 January 2022
5 minutes

Stock markets are cyclical. The Bull and bear phases are two of the most important cycles of the stock market. Once either the bull phase or bear phase starts, it may last for a few years. Let’s learn about when you should invest in a SIP, during a bull phase or bear phase?

What is the Bull Phase?

In a bull phase, market participants’ expectations are positive, and stock prices of the companies belonging to almost all segments are expected to be in an uptrend. In the bull phase, from time to time, stocks break their all-time highs. The bull phase occurs when the economy is doing well.

What is the Bear Phase?

When the market is in the bear phase, investors feel pessimistic about the near future. This occurs mainly due to the bad performance of the economy. In this phase, stock prices are expected to fall. During any scam, pandemic, or war, the bear phase usually starts with a huge market crash.

What is a SIP?

A systematic investment plan (SIP) is often known as a SIP. It is a mutual fund tool that allows participants to invest in a disciplined way. The SIP option enables investors to invest a certain amount of money in a mutual fund scheme at predetermined periods.

An amount as little as Rs. 500 can be invested in mutual funds using SIP. The predetermined SIP interval could be weekly, monthly, quarterly, semi-annually, or yearly. By investing in a SIP, the investor invests in a time-bound way without worrying about market fluctuations and intends to gain returns in the long run, owing to average costs and compounding power.

SIP Benefits

  1. The compounding impact amplifies the benefits of investing consistently through SIP over the long term. The compounding effect assures that you receive returns not just on your primary amount (real investment) but also on the gains on your principal amount, i.e., your money grows over time as your investment generates returns.
  2. The earlier you begin saving and investing regularly, the easier it will be to attain your objectives. An amount of Rs. 5000/month over a long-term could be converted into a vast corpus. The value of corpus depends on how early one starts investing.

When should you start a SIP? In the Bull or Bear Phase?

In the bull phase, every day, the stock market tries to break its own record by making new highs. During this phase, the number of units that investors can buy in a specific amount of money keeps on decreasing from month to month. 

For example, when the cost of each SIP unit is Rs.50, investors can buy 100 units for Rs. 5000. If another investor wants to invest Rs 5000 in the same SIP unit in the next month, they may not get 100 units for the same amount of money. As for this month, the SIP unit cost may have increased further from Rs 50 to Rs.53. With this price, investors would get only 94 units instead of 100.

In the bull phase, the number of units an investor buys for a specific amount of money may decrease from time to time, but the returns still grow. That is the good part of the bull phase. So, should you start investing in the bull phase? But wait! Let’s know about the bear phase too, and then we can conclude.

The bear phase is quite the opposite of the bull phase. The stock market would be falling in this phase. The number of SIP units that investors buy would be increasing every month. For example, if one unit cost is Rs. 50, an investor can buy 100 units with Rs. 5000. In the bear phase, since the market falls, the number of units that they are going to receive each month while investing the same amount of money would be >50. 

That means, in a bear phase, once the market had started falling, the cost of 1 SIP unit could decrease from 50 to 45. For instance, in this case, the number of units that the investor will receive for an investment of Rs.5000 per month would be 111.

If you start a SIP in the bull phase, the NAV will average on the upper side every month when you buy new units. In the case of a bear market, NAV averages on the lower side. Stocks grow in a bull phase and offer good returns. So, when to start a SIP? In the bull phase or bear phase? For good returns, investors consider the bull phase. 

But the main issue is that no one knows when the bull phase begins because it is hard to time the market. So, instead of timing the market, it is better to start investing when you have time and funds, as SIP investments perform better in the long term.

Key Takeaways

  1. Do not time the market. 
  2. If you intend to be a long-term investor, the current market phase does not matter.
  3. SIP offers good returns in the long term, irrespective of the current market phase.

Conclusion

Given all the scenarios that we have discussed, I suppose that it is in our best interest to continue or start with SIPs irrespective of whether the markets are in a bull or bear phase.

While choosing a fund you should look into various key parameters, you must have a long-term vision in mind and make sure to stick to it during rough times as well.

Disclaimer – Mutual fund investments are subject to market risks. Please read all scheme-related documents carefully before investing. Past performance of the schemes is neither an indicator nor a guarantee of future performance.

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