Aug 26, 2013,16.05 IST
Here's why you should not stop systematic investment plans
International Money Matters
Equity markets are at the mercy of sentiments in the short run, especially when the sentiment is at either extreme- euphoric or bleak! This is a fundamental truth about equity investing which one should never forget but most investors nevertheless do.
Not only do many investors cash in their stocks but also stop their SIPS – Systematic Investment Plans in SIPs.
While there may be merit in cashing in your stocks (that is a subject for another post, another day), there is no reason to redeem your SIPs.
Yes, mutual funds are not doing well now; obviously because the stocks are not doing well. Funds giving returns of 20%, 30% return just a year back are now giving single digit returns or in some cases negative returns. But this should not be reason to stop your SIPs, on the contrary if the scheme has been giving good long term returns then this is the time to increase your monthly SIP.
For, the whole purpose of the SIP is to curb the volatility of equity markets and average out you r investment. It’s really simple. The NAVs of the various mutual fund schemes have come down – which means for the same amount that you invest every month through SIP, you will get more units of the mutual fund.
So your cost of investment comes down giving you a more competitive average cost of unit of the mutual fund. Plus an SIP is designed to make your job easier by eliminating the need to keep track of markets. It’s a hand free technology!
Understand this, equity markets follow the growth of an economy. If an economy is doing well or has the potential to do well with many favourable factors, then its equity market will go up in the long run despite volatility and rough patches in the short run.
The graph of the equity markets will be moving upwards. If you think India is not going to grow or its growth story has run its course, then you should not be investing in equity but other asset classes – perhaps debt, gold, real estate or any other.
If you think and believe India is only going through a rough patch and it will bounce back as fundamentals are still in place, then equity is your game and you can forget about your SIPs, let them go on, accumulate and ultimately provide you with enough funds for your long term goals.
Yes, long term is the buzz word here. Select good, solid schemes that have a track record for weathering storms like this and continue investing them for the long term.
If you were to stop your SIPs with the notion of getting back into the markets when the storm has passed, then you may most likely miss the bus with anything from a 20% to 30% recovery happening in a week to 10 day’s time. You may be happy that you got out before it fell further, but you could lose a huge jump of growth in the market.
So you should continue your SIPs in adverse times rather than stop.
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