R.C.Rawal
(B.Com, LLB, F.CA, Chartered Accountant),
Director Imperial International Pvt. Ltd
Make the most of SIP in Volatile Market Conditions
There are several ways in which an investor can take exposure to equities. Investors can either choose to go direct by investing directly into stocks or can opt to invest through an equity mutual fund. Over the past few years, systematic investing into equity mutual funds via Systematic Investment Plans (SIP) has been gaining traction. Investors today are opting to be disciplined in their investments, which is an encouraging sign for creating a
thriving equity culture among the masses. Of late, as the markets have become volatile, some investors are having second thoughts about their SIPs. Many, in the anticipation of a correction, are stopping SIPs which is an erroneous move.
For the uninitiated, an SIP is a mode of investing that allows an investor to invest a fixed amount in a mutual fund scheme periodically, at fixed intervals. This is similar to a recurring deposit where you deposit a fixed amount every month. Since SIP is automated, one need not fear about missing out on investing in any month. While an SIP looks like a simple arrangement, when done in a disciplined manner over a decade or more, this emerges as one of the most powerful tools to create long term wealth.
Here is how an investor can make use of SIP to make the most of a volatile market
- Getting the best Bargain- When investing in a falling market, an investor gets the opportunity to accumulate more units of the scheme one is investing in. On the other hand, when the market rallies, the number of units one gets reduces. When done over a complete market cycle (including bull, bear and sideways markets), one gets the opportunity to accumulate a sizeable number of units, which proves to be very beneficial over the long term.
- Average down costs- Apart from accumulating more units, in a volatile market, an investor also gets the opportunity to average out the buying price. The ability to reduce the average price over the long term is what makes an SIP powerful. In financial parlance, this is known as Rupee cost averaging. This works best in volatile markets as one can buy at varying price points.
- No worry of timing the market- One exercise in which investors waste maximum time and energy is timing the market. However, the truth is not even the best fund manager can predict when the market has reached a peak or a bottom. So, it is best to accept that no one can get the market timing right. The only way to gain from the market is by being disciplined with regular investing and by being patient. SIP ensures no matter what the market condition is, the investment is made every month.
- Benefits of Compounding- Power of compounding is the hallmark of mutual fund investing through SIPs. In simple terms, compounding means that the return that you have already earned on an investment, in turn acts as an investment itself, thereby increasing the final return. Over longer periods of time, this compounding effect has the potential to turn a few thousands each month into several lakhs.
- Goal based Investing- Very often an individual will have several financial goals to meet. These can be short, medium or long term in nature. Generally, short term means upto three years, medium term is three to five years and long term is over five years. A SIP can help an investor achieve goals in each of the three timeframes. By initiating a SIP for each of the goal one has, it brings focus and discipline for each of the
requirements. Also, one will know if there is a supposed shortfall likely for any of goals at least say a year in advance and corrective remedies if any can be taken.
One of the mistakes many investors make is to keep the amount of SIP constant over the entire lifetime of a SIP. This is to be avoided. As one’s income increases, it is recommended that one proportionately increases the SIP amount as wel. This will ensure that along with the rise in income, savings too will increase. Also, one may reach the desired goal early as well.
To conclude, SIP is an efficient tool for long term wealth creation but its success lies in how well an investor utilizes it in one’s investing journey.