SIP: An Antidote to Market Volatility
By Akhil Chugh
Date November 13, 2022
The stock market is just like the weather – it’s unpredictable. Volatility is a part and parcel of equity markets and investment journey.
Market volatility can give investors an impression that they are losing their money and hence, many investors withdraw from mutual funds when they see that the funds are not performing as per expectations. This step is detrimental to your investment goals as the performance of the funds may bounce back and over the long term may fetch you really good returns.
Internal developments within companies, geo-political factors, macro-economic factors, natural and man-made disasters can make the markets volatile. It is not possible to control the variables impacting volatility but we can take actions to reduce their impact on the investment portfolio.
When the markets are volatile, it’s prudent to stay invested rather than pausing or redeeming your investments to take advantage of market volatility through rupee cost averaging.
Systematic Investment Plan (SIP) is a prudent approach to both beat volatility and also benefit from rupee-cost-averaging at the same time. Let’s learn more about SIP and some tips to beat market volatility.
What is SIP?
Simply put, a SIP is a vehicle or an approach to investing a fixed amount in any fund or scheme at regular intervals. By investing across market ups and downs, SIP ensures that the cost of investment averages out over a period of time.
Systematic Investing means:
- Investing a fixed amount
- Investing for a continuous period
- Investing for a defined goal
Market volatility can work in your favour if you keep on making periodic investments with the help of SIPs in mutual funds.
Tips for Investing During Volatile Times
1. 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. So, staying invested through SIPs is the best strategy to handle market volatility. Remember, SIP can be an investor’s best friend during market volatility.
2. Never stop your existing SIPs:
Systematic Investment Plans (SIPs) are investment routes designed to help you sail the market volatility. SIPs involve investing a fixed amount of money in mutual funds at regular intervals. SIPs make timing the market irrelevant. With periodic investments, SIPs can help investors to average out the rupee cost. You get more units when the market is low and less units when the market is high. This averages out the purchase cost for an investor.
SIPs are the best way to diversify your investments without the risk of entering the market at the wrong time. With rupee cost averaging and the power of compounding at work, continued SIPs during volatile times can bring attractive returns in the long term.
3. Invest for the long term:
SIPs give the maximum benefit to long-term investors. Looking at the past performances of financial markets, it has always recovered from sharp corrections and crashes in the long run. Though the required time to bounce back can vary across different crisis, markets eventually bounce back. Patience is key here.
Thus, long-term investment strategy is the best strategy to optimize your portfolio’s performance.
4. Diversify at all levels:
Diversification is key to a successful investment journey. Never put all your eggs in one basket. Try having a diversified portfolio within investment circles. Depending on your risk appetite, decide on the percentage of your portfolio that you want to invest in equity mutual funds, Debt Funds, Bonds, and Term Deposits.
There are different diversification routes that can be opted for optimum portfolio diversification:
a. Funds across market capitalizations: If your existing portfolio is tilted towards blue chip or large cap focused funds, you can look at funds that offer good quality stocks in the mid-cap or small-cap stocks.
b. Funds across geographies: Spreading your investments across geographies is diversification on a global scale. Global funds are mutual funds that invest in securities of foreign companies listed in foreign markets. Investing in global funds can give an investor access to invest in the international equity market. Such diversification can save your portfolio from geographical concentration.
c. Funds across sectors: Uncertainty related to the pandemic crisis has served as a stark reminder that discretionary spending on vacations, luxury items and other non-essential goods and services can dry up amidst such scenarios. Ensure that you invest across essential sectors like banking, health etc. Look at sector fundamentals and pick sectors that have the potential to recover quickly once the market bounces back.
d. Diversify across debt funds: There are various debt funds that are available to investors investing in different debt instruments giving investors an opportunity to diversify in this segment as well. There are income funds, dynamic bond funds, liquid funds, gilt funds, and fixed maturity plans. Look at your existing portfolio, analyse it and then invest in funds that have no correlation to your existing investments.
Net Brokers Takeaways:
Given the current environment, it is important that investors maintain financial discipline with respect to asset allocation and diversification. Times of volatility offer a great opportunity to re-evaluate and possibly rebalance your asset mix.
- Continue your investments strategically via SIPs
- Do not redeem your current investments out of fear
- SIPs help during market volatility by averaging the cost per unit of your investments, thereby, reducing the overall price fluctuations over the long term
- Concentrate on building a diversified portfolio
- SIP in a Multi Asset Fund is a good way to diversify your portfolio across varied asset classes.
- Take your diversification to global scale and invest a proportion of your portfolio in global funds.
- Have a portion of your funds as ‘Emergency Funds’
Stay invested and diversified!
If you’re concerned about market volatility, and still confused about how to adjust your existing portfolio to optimize your investments, then don’t hesitate to talk to a financial expert at Net Brokers.
Happy investing!