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Invest in SIPs and ride the market volatility with ease

13-NOV-2019

Author: Team - Edelweiss Partners

The tense situation of highly erratic market movements coupled with fluctuating fuel prices seem to be prevalent these days. And investors are the worrying kind. With so many random events hitting the numbers, it is but natural to worry about protecting their investments. And if you are an investor who is nervous about the recent happenings in the equity markets, then SIP will work best for you.

SIPs, or Systematic Investment Plans, are just another route offered by the mutual fund industry to make investments. As the name indicates, it is structured investment with different options. You may be wondering why this method, instead of directly entering the equities market. A fundamental fact of our financial world is that markets are always in motion. They fluctuate and are influenced by any or all information, sometimes it seems even by mere thought. The unpredictability of the ups and down makes it difficult to regularly track, invest and exit the market.

How to ride market volatility?

The best way is to systematically save small amounts and invest them in regular intervals over a period of time, to create a large corpus. Starting an SIP will help harness the power of compounding as a set amount will get invested every day/ week/ month irrespective of the vagaries of the market. Compounding is nothing but the ability of an asset to generate earnings, which are reinvested in order to generate more earnings. The interest earned from invested amount will be re-invested, and thus increases the principle amount. For example, Rs 5,000 saved and invested every month for a period of 20 years would grow to Rs 30 lakh at a conservative rate of 8% and at an accelerated rate of 15%, this could even grow up to Rs 76 lakh. So it is common knowledge that SIP facility not only inculcates financial discipline, it helps the investor to negate the effects of market cycles as well.

But even the most disciplined of investors can get anxious when markets turn volatile and the financial health of their portfolio is not at desirable levels. The first reaction is to stop all investments and second instinct would be withdraw funds if the volatility persists. We recommend you pause and think it over before taking any action to avoid future regret.

Let us start by asking ourselves the basic and foremost goal of our investment journey. Was it to time the market and make reactive decisions or was it to accumulate and grow wealth over a period of time for a solid and well thought of financial goal? If the answer is the later, then you have every reason to be happy during the bumpy ride now. Your cost of purchase is lower and you will be able to get more units for each of your SIP installments. This is the principal of cost averaging.

For Example:

You start a Monthly SIP of Rs 5000 in a scheme. Given below are the amount invested and the units allotted:  

Months

Rs

Allotted

M1

5000

500

M2

5000

490

M3

5000

485

M4

5000

510

M5

5000

505

M6

5000

512

The average cost of purchasing unit comes down over the long-term. This simple understanding is important. It is applicable to all market scenarios. And what happens if you decide to withdraw investments halfway due to market sentiments? Firstly the value of the investment may be lower than the total amount invested and secondly the most recent investments may not be free from exit load period.

Thus in a rising market the amount invested fetched lesser units while in a falling market the same amount gets more units as the NAV is falling. It helps to reduce the overall cost of acquisition by averaging the cost during volatility. Even the best and worst performing schemes have seen ups and downs in their NAVs. Hence one should adopt a strategy where timing is not required.

With SIPs, a fixed amount being invested every month as per investor’s convenience will be lighter dent on the wallet. If there are no immediate financial needs, investors should look at continuing the SIPs as long as they can. This is important as they get the benefit of being for a longer time in the market while also availing of the benefits of compounding. Historical trends show that over long periods, volatility is smoothened out and expectations of inflation beating return from investment gets fulfilled by patiently sticking to SIPs.

To sum it up, SIPs offer several advantages particularly in a volatile market:

  • Decision-making without influence of short-term events or emotions.
  • Surplus funds are deployed actively towards fulfillment of the financial goals.
  • Consistent investing

Even history of financial markets has shown time and again that those who have been patient have reaped rewards. Whether it was dot com bubble in 2000, the south-east Asian crisis or the banking industry led recession in 2008 or the oil prices or the US interest rate policies, statistics of past day show that temporarily the NAVs of even the best performing funds saw erosion. And those who have weathered the storm by steadily investment despite the negativity have saved their capital as well made fruitful gains.

Along your investment journey, Edelweiss Partners offers you an online platform to invest in Mutual Funds, keep track of your SIPs and so on. It also provides access to the online transaction platform, market analysis, Fund reports and financial planning tools to help you achieve your financial goals.

The secret is that only in an ever-changing market scenario, wealth creation is possible.

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