Case 060Client situations and behaviourWarm up

A client paused his Rs 25,000 monthly SIP for 12 months during a 20% fall and restarted after the recovery. How many units did he miss buying cheaply, and what did the pause cost him at recovery?

The situation

Amey Kulkarni-Rao, 34, has run a Rs 25,000 monthly SIP in an equity fund for six years. When the fund's NAV started falling from Rs 100 he paused the SIP, kept the money in his savings account, and restarted a year later once the NAV was back at Rs 100.

Over the twelve paused months the NAV went 96, 92, 88, 84, 80, 80, 82, 85, 88, 92, 96 and 100: a fall of 20% to the bottom, then a full recovery. He now asks whether the pause cost him anything, since the NAV is exactly where it was.

Your task

How many units did the pause skip, and what is the cost in rupees at the recovered NAV?

Quick check

The NAV is back where it started. Did the pause cost Amey anything?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

He skipped 3,404 units and is about Rs 40,411 worse off at the recovered NAV. The twelve paused instalments would have bought units at an average of Rs 88.13, below the Rs 100 NAV he restarted at. The same Rs 3 lakh invested after recovery buys only 3,000 units. The pause did not avoid the fall; it skipped the cheapest purchases in it.

Step 1Why does a pause cost anything if the price comes back?

A shopper who stops buying rice during a sale and restarts when the price is back to normal has not saved money; she has paid full price for rice she could have bought cheaply. An SIP buys more units when the NAV is low, so the months of a fall are when each rupee works hardest. At a NAV of 80, Rs 25,000 buys 312.5 units; at 100 it buys 250. Pausing in a fall skips precisely the months that would have bought the most.

The pause skipped the cheapest months: units each Rs 25,000 would have boughtSIP paused, months 1 to 128090100110260312312284250units missedSIP restarts0369121518Month (NAV in rupees on the left axis)
During the twelve paused months the NAV fell from 100 to 80 and recovered to 100, and each Rs 25,000 instalment would have bought between 250 and 312 units, 3,404 in total, against 3,000 units for the same money after the recovery.
Step 2How many units, and what are they worth?

Add up Rs 25,000 divided by each month's NAV. The twelve instalments would have bought 3,404.1 units at an average cost of Rs 88.13; at the recovered NAV of 100 they would be worth Rs 3,40,411, against Rs 3 lakh paid in. Amey kept the Rs 3 lakh in his savings account; invested at 100 now it buys 3,000 units. The gap, 404.1 units, is Rs 40,411, before counting the small interest the savings account paid, a few thousand rupees at most.

Month123456789101112
NAV9692888480808285889296100
Units260272284298312312305294284272260250
Each Rs 25,000 instalment would have bought between 250 and 312 units as the NAV moved from 96 down to 80 and back to 100, 3,404 units in total at an average cost of Rs 88.13.
Step 3How do you say this to Amey without blaming him?

He did what most people do when they see losses, and the conversation should start there. Show him the table, then agree a rule for next time: the SIP runs through falls unless his income or goals change. The cost here, 13.5% of the paused amount, is small against his whole portfolio, but the same habit in a deeper or longer fall costs far more, and the missed units would also have compounded for decades. The honest limit: if the fall had kept going and the fund never recovered, pausing would have looked right; the case for continuing rests on the belief that a diversified equity fund recovers over his horizon, which is an expectation, not a promise.

Where candidates lose it

The trap is the unchanged NAV. Candidates say no harm done because the price is where it was, missing that the SIP's whole mechanism is buying more units at lower prices.

The second miss is lecturing. The interviewer is listening for the number and for a way to talk to a client who has just made a very human mistake.

What the interviewer asks next

  • What if the NAV had recovered only to 90 when he restarted?
  • Would doubling the SIP during the fall have been better? What are the risks?
  • How would you set up his SIP to make pausing less tempting?

Company names and figures are illustrative.