A Systematic Investment Plan (SIP) is a way to invest in mutual funds. Through SIPs, you can invest a fixed amount at regular intervals for a defined duration. With a SIP, you have the liberty to pick your investment amount, investment duration and also investment frequency. You can start building a significant corpus with time at your convenience. Furthermore, you need not worry about the timing of your investments. Market volatility works in your favour if you are making periodic investments. This article dives deep into SIP as a powerful tool against the market volatility concept.
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Why SIP is a Powerful Tool Against Market Volatility?
By making small, long-term investments, you can accumulate wealth to fulfil your future financial obligations. With SIPs, you may make progress towards your financial goals without having to wait until you have accumulated a sizable sum before investing.
However, even the most diligent investor may experience anxiety when markets become extremely unpredictable. Once the investments begin to deviate from your expectation, you may tend to cease future investments. Also, if volatility persists for an extended period, you may withdraw your investments completely.
However, do you think it’s the ideal strategy? What about your financial objectives and goals for which you have started the investment? Let’s carefully analyze the scenario and see if it actually benefits us to hold on to the investments during volatility.
Let’s begin with understanding your investment objective. What was the objective of your SIP investment in the first place? Was it to time the market and make tactical decisions in the near term? Or was it to save and build a significant corpus over time? Without a doubt, it is the latter.
With accumulating wealth as your goal, you will most certainly be surprised to realize that your acquisition costs are lower when the markets are volatile, and it actually works in your favour.
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Let’s understand this with an example. Ms Divya invests INR 5,000 per month in a large-cap fund.
|SIP Date||NAV||SIP Amount||Units|
The total number of units Ms Divya has on 15/01/21 is 2126 units. Her total investment amount is ₹65,000. The NAV as on January 15th 2022, is ₹41. Thus, the value of her holding as on January 15th is ₹87,697.50 (2126 units * ₹41.25).
Had Ms Divya exited her investments on April 4th 2020, when the market fell, her investments would have been in loss. However, having continued through the market volatility, Divya was able to accumulate a higher number of units at lower prices. Furthermore, exiting her investments early would attract an exit load as well. Thus, the net returns for her would have been much lower than her investment value itself.
Sitting tight through the volatility will not only help you accumulate more number of units but also will reduce the average cost per unit. Thus, in the long term, with a higher number of units, and NAV appreciation, you’ll be able to generate significant returns. Hence SIP acts as a powerful tool against the market volatility.
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SIP and Volatility
Stock prices fluctuate with market demand and supply. Volatility occurs when these fluctuations become more frequent, and stock prices significantly rise and fall. Increased volatility in the stock market is extremely dangerous. As a result, it gets more difficult to predict the movement of stock values.
Investors with a limited understanding of market fluctuations frequently lose large sums of their hard-earned money during such phases by making hasty decisions. Traders gain from these investors’ sentiment-driven decisions.
However, small investors who do not know much about the stock markets and wish to invest in stocks can invest in mutual funds. Through SIP investing, you need not worry about having to time the market. Regular and disciplined SIP investing can help you overcome market volatility. You can accumulate more number of units when the markets are low and benefit from price appreciation when the markets recover.
Tips for Investing During Volatile Times
Following are some tips to keep in mind during market turmoil:
- Patience: If you are already investing through SIP, continue it. Allow disciplined investing to work in your favour.
- Avoid Panic Selling: Generally, any investment decision taken in haste will not end up giving you good results. During volatile periods, panic can make selling appear rational. However, it is important to note that markets will recover eventually. It’s just a short period of downturn.
- Long Term Investing: Once the crisis is passed, the markets will resume their focus on fundamentals. If you have invested in fundamentally strong funds, you need not worry. Upon recovery, you will be able to enjoy good returns. Thus, having a long-term investment horizon will help you overcome market volatility.
- Diversify: Volatile markets emphasize the importance of diversity. Having a well-diversified investment portfolio will help minimize the impact of market volatility. The risk of heavy losses will be well balanced with a well-diversified portfolio.
Advantages of Systematic Investment Plan (SIP)
- Compounding: SIP helps compound returns over the long term. In other words, when you invest through the SIP route, the earnings are reinvested into the mutual fund scheme. Thus, when the returns are reinvested, the compounding effect comes into play, which aids in the creation of further wealth.
- Low Investment: SIP is a set amount that you invest each month. This helps reduce the pressure of investing a large lump-sum amount at a time. You can invest any amount that is comfortable for you and use SIPs to create a significant corpus over time.
- Lower Average Costs: While you invest consistently over time, you gain more units when prices are low and fewer units when prices are high. This contributes to the reduction of your average cost of investment.
- Convenience: SIPs are an extremely convenient way to invest your money. They do not necessitate extensive market research or being proactive in response to market movements. This enables small investors to invest their capital easily.