When all is well, there is absolutely no need to insulate oneself against a downtrend, given that the equity markets have scared us in the past and will continue to do so in the future as well. For an SIP to deliver the goods, it must witness a falling market. This way the investor can average out his cost of purchase. If the investor does not witness a downturn, ie he is only exposed to a market rally, the average purchase cost of his SIP will rise over a period of time.
The equity market cycle is normally between a 3-5 year horizon; there could be sharp intermediate glitches as well over such a period. Hence, looking at the mentioned horizon will ensure that we have had a rollercoaster ride over the market cycle and at the same time, continued to invest across all the slumps to average our cost effectively.
For one of the funds mentioned above -- Reliance Growth, we have the following data:
As one can evidently see, the highest number of units are bought at the highest point of NAV and vice versa. This grossly averages the cost. This principle is called Rupee Cost Averaging. While the popular belief is that SIPs are used to eliminate market-timing, investors must opt for a long-enough SIP tenure so as to 'time' the market downturn.
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