Article | Sip - Aug 24, 2016 | 21:35 PM
Much like the tides in the sea, the bourses can be pretty unpredictable as well. Just like the tide that rises one day and withdraws another, similarly, the stock market fluctuates every day, going up and down. At certain times the volatility can be much high, leading to despair and disappointment. In periods of high volatility timing is critical. A sudden rise in prices can escalate the value of your investment, at this point, traders sell their investments at the high value that they will receive. On the other hand, a sudden drop or a crash can leave your investment value in tatters. The market has been turbulent, ever since the crash on August 24, 2015, which was the largest drop (1,624.51 points) the S&P BSE SENSEX has ever witnessed.
In such times investing can be a big gamble even for experienced traders. But this does not mean one should stop investing at all, and wait till things settle down. On the contrary, investors should opt for Systematic Investment Plans (SIP) and harness the power it possesses. SIPs are similar to a recurring deposit account in banks, except the money is invested in a mutual fund and not a bank deposit. Typically, this sum collected by MFs is invested in the debt/equities. But rather than being a loss-making proposition, SIPs can make positive gains even when the markets are unstable.
SIP includes the following benefits, which make it a suitable tool for investing in volatile equities.
In SIP, a fixed sum of money is invested periodically. Depending on whether the market is going up or down, the numbers of units that can be purchased vary, since the sum of money to be invested is fixed. Hence, when the market is going up, fewer units are bought at a high price and when the market is going down, more units are purchased at a low price. This induces a habit of investing, even when the market is low and other investors generally do the opposite and also in the long run SIP reduces the average cost of investments.
In SIPs, you can invest small amounts over a long period of time instead of a lump sum amount in one go. This way you can invest regularly and not face a financial block since the amounts are small. Also, volatility in the market will have small effects on small investments and not a big effect in the case of a one-time lump sum investment.
Power of Compounding
SIP is based on the principle of compounding. Regular investments calculated with compound interest earned on your investments could potentially increase your returns at a growing rate leading to a substantial amount at the end of a long term.
SIPs aim at long-term wealth creation. Since SIPs make you invest regularly regardless of market conditions that are prevailing, one develops investment discipline. Equities have the potential to outperform other instruments such as debt and gold in the long term. SIP in a mutual fund with the help of compounding and rupee average costing can stabilise the volatility to a certain extent and help you get the maximum benefit of long-term equity investment.
In the end, wise investors will understand the power of small and regular investments. Investment in equity funds through SIP can be a relatively less risky proposition, in comparison to direct investment in equities. Also, it has been shown time and again that sustained investments over a long-term help build a substantial corpus. Hence, SIP route to mutual funds can be a good strategy to adopt.
Disclaimer: SIP does not assure a profit or guarantee protection against loss in a declining market. In view of individual nature of consequences, each investor is advised to consult his/ her own Financial advisor before taking any investment decision.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
Are mutual funds a reasonable investment in bull market?
Indian Mutual Funds have currentlyinvested about 1.35 crore (13.5 million) SIP accounts through which investors regularly invest in Indian Mutual Fund schemes. (March 2017. Source: AMFI)
Average Assets Under Management (AAUM) of Indian Mutual Fund Industry for the month of March 2017 stood at ₹19.26 lakh crore. (Apr 2017. Source: AMFI)
Equity-oriented schemes account for around 32.8% of the industry's assets. (March 2017. Source: AMFI) Equity-oriented schemes derive 85% of their assets from individual investors. (March 2017. Source: AMFI)
HNI investors account for 20.98% of investments for a period of 12-24 months. (Source: AMFI)
Index funds usually have much lower operating expenses over actively managed funds.
This figure represents the fund's total asset base, net of fees and expenses.