Shield Yourself From Market Volatility With SIPs
By Akhil Chugh
Date October 20, 2024
Market volatility is the heartbeat of the financial world, the pulse that constantly surges and wanes, shaping the fortunes of investors. It’s the unpredictable force that can send stock prices soaring to dizzying heights one day and plummeting to alarming lows the next. To succeed in the world of finance, one must not only understand market volatility but also learn to navigate its tumultuous waters.
Volatility can be triggered by a multitude of factors, including economic data releases, geopolitical events, corporate earnings reports, and even social media trends. Volatility is an inherent part of the market. It can’t be done away with. Hence, the need is for a mechanism that can counter it. That mechanism is Systematic Investment Plans (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 volatile markets.
How SIPs are Beneficial in Volatile 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.
As per the table illustrated above:
If SIP of Rs 10,000 is done throughout the year then,
Total Amount Invested Regularly for 1 year = Rs 1,20,000
Average Cost = Rs 12.6
No Of Units Purchased = 9,554
However, if Lumpsum investment of Rs 1,20,000 was done in month of Jan then,
Average Cost = Rs 14
No Of Units Purchased = 8,571
When the markets fluctuate, you may be tempted to stop/withdraw your SIP investment. But it pays to think long-term, because you can buy more units during a falling market, and also, the cost of your investments will average out over a period.
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 use 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.
Tips to Follow During a Volatile Market:
When markets swing wildly, it’s easy to succumb to fear and make impulsive decisions that can harm your financial goals. To help you stay on course, here are some SIP tips to follow during a volatile market:
1. Stay calm & committed to your plan:
If you are already investing through SIP, continue it. Have patience and allow disciplined investing to work in your favour. The essence of SIP is consistency. Stick to your predetermined investment schedule, whether it’s monthly, quarterly, or any other interval. Market volatility should not deter you from your long-term goals.
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. Focus on Asset Allocation:
Review your asset allocation periodically. Ensure your portfolio aligns with your risk tolerance and investment objectives. Diversification can help spread risk across different asset classes.
4. Avoid panic selling:
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, the best strategy is to stay invested via SIPs.
5.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.
6. 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.
7. Seek financial advice:
If you’re unsure about your SIP strategy during volatile times, consider seeking advice from our team of financial experts at Net Brokers to provide guidance tailored to your specific financial situation and goals.
It is natural to panic in a volatile market when you see your investments in red. However, it is important to continue your SIPs to take advantage of rupee cost averaging in the long run. SIPs can help you to weather market storms so stay invested in mutual funds via SIPs and embark on a journey of wealth creation.
So, get ready to benefit from rupee-cost averaging, set your goals and calculate the target amount required to invest and be consistent regardless of price fluctuations and create wealth in the long term to realize your dreams.
For more information, get in touch with us today! Download our mutual fund app & start investing for your long-term financial goals.
Stay Invested!