SIP – A Powerful Tool Against Market Volatility
By Akhil Chugh
Date June 19, 2022
Like the weather, the stock market is highly unpredictable. Volatility is a part and parcel of the capital markets and thus the investor’s investment journey. Market volatility is usually perceived negatively by investors giving them the impression that they are losing money. Thus, making them withdraw from mutual funds or stopping their SIPs when they see funds are underperforming. However, this strategy is based on a short-term outlook and can harm an investor’s long-term investment objective.
Markets are volatile by nature. The sooner investors accept volatility as a friend and learn to manage it, the better off your investment will be. It is not possible to control the macro-economic variables impacting volatility but we can take actions to reduce their impact on the investment portfolio.
There is a known proverb, ‘Slow & steady wins the race.’ Steady is the word to be given importance here in the context of beating market volatility. This is a fundamental concept of one of the most popular forms of disciplined investing methods, i.e., a Systematic Investment Plan (SIP) to create wealth and achieve long-term financial goals. Taking and continuing the SIP route is an ideal way for investors to invest in the equity market in the prevailing volatile phase and avoid timing the market.
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.
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 favourable 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:
Following are a few SIP tips to follow to beat market volatility:
1. Keep patience:
If you are already investing through SIP, continue it. 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. Net Brokers believes this is an ideal time to step-up your SIPs to make the most out of falling markets.
3. 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.
4. Be a long-term investor with 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.
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.
For more information, get in touch with us today! Download our mutual fund app & start investing for your long-term financial goals.
Happy SIPs!