Why Market Corrections are the Best Time for SIPs?
By Akhil Chugh
Date Jan 19, 2025
The equity market has witnessed intense volatility off late due to varied factors such as global economic trends, domestic policy changes, geopolitical events, and investor sentiment. Several key equity indices are down sharply from their peaks. This has impacted the returns of equity mutual funds as well.
Investing in the stock market is often accompanied by emotional ups and downs. For many, market dips trigger fear and panic. However, seasoned investors know that such downturns are golden opportunities, especially for those following the Systematic Investment Plan (SIP) approach. Let’s explore why market dips are actually the best times for investing in Mutual funds via SIPs.
SIPs aren’t magical; they are just a systematic way to invest. By investing periodically, ideally monthly, you become disciplined about investing. More than discipline, SIPs help equity investors navigate market volatility. Let’s learn how SIPs can help in falling markets.
The Psychological Barrier: Fear vs. Opportunity
When markets fall, the natural reaction is to hit the panic button. Many investors stop their SIPs or even redeem their investments to avoid further losses. But here’s the catch: market dips are like a discount sale on your favorite products. If you’re willing to buy more during sales at a shopping mall, why hesitate when the Indian stock market is offering stocks and mutual funds at lower prices?
How SIPs are Beneficial in Falling Markets?
SIPs are a prudent way to beat market volatility in the long run. Let’s understand it in detail below.
1. Rupee-cost averaging:
It is hard to predict when the market will be at its peak or low point. Investing through SIP makes timing the market irrelevant.
One of the most important advantages of SIP is rupee cost averaging. When you invest a fixed amount every month, the number of Mutual Fund units you actually buy depends on their market price. Therefore, with the money you invest each month, you can buy fewer units when the market moves up and more units when the market moves down. This brings down and averages the price of purchase. This in the long run enhances your returns on investment substantially.
Thus, rupee cost averaging helps an investor beat market fluctuations and makes an investment averse to market volatility. By staying invested via SIPs in turbulent markets, investors can buy more units, and as markets turn favorable investors will receive fewer units. In the long run, SIPs can act as a shock absorber for your investment portfolio.
2. Benefits of compounding:
SIPs uses the power of compounding to invest over time and through various cycles of market volatility. Compounding is when your interest earnings are added to the principal amount to increase future returns. It is called the power of compounding because you earn interest on interest. This helps to create a larger corpus in the long run.
SIPs thrive on the power of compounding. By purchasing more units during a dip, the gains from a market rebound are amplified. Indian equity markets have historically shown resilience and consistent growth, making them an ideal ground for compounding to work its magic.
Tips to Follow During a Falling Market:
1. Stay calm:
If you are already investing through SIP, continue it. Have patience and allow disciplined investing to work in your favour.
2. Falling market can be a good opportunity:
A falling (low) market is considered an opportunity to invest more at a lesser price. Purchasing more units when the markets are low will aid in bringing down the average cost of the unit.
3. Avoid panic selling:
Any investment decision taken in haste will not end up giving you good results. During falling phase of markets, 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, the best strategy is to stay invested via SIPs.
4. Have a goal-based investing strategy:
Set your investment objectives at the very start. Investors must understand that a goal-based investment strategy accompanied by a long-term investment horizon can make market volatility your friend. If you have invested in fundamentally strong funds, you need not worry. Upon recovery, you will be able to enjoy good returns. Thus, having a long-term investment horizon will help you overcome market volatility.
5. Do not discontinue your SIPs:
To get the most out of a SIP, it is crucial to stay invested during the good and the bad times, including during volatile times in bad market conditions as well. Remember, it’s just a phase and you’ll get through it. The point is that if you ignore stock market disruptions and stay invested through the course of the investment, you might end up making a considerable amount of money.
Net Brokers Takeaways
In fluctuating markets, 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. Below are a few tips for our investors:
- 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.
- Have a portion of your funds as ‘Emergency Funds’.
Remember, wealth creation is a marathon, not a sprint. SIPs are designed to leverage market fluctuations to your advantage, and market dips provide an unparalleled opportunity to accelerate your financial growth.
For more information, get in touch with us today! Download our mutual fund app & start investing for your long-term financial goals.
So, the next time you see the Indian markets in the red, smile and know that your SIPs are working harder for you!
Stay invested.