SIPs: Hold Your SIP To Counter Volatile Markets – Axis Direct
E-Conversations by Mr. Arun Thukral, MD & CEO, Axis Securities
Apr 25, 2018 | Source: ET
Hold Your SIP In Volatile Markets
Financial planning to pursue major life-goals has become a key priority of investors in India. With rising awareness levels, retail investors have started exploring options like equities and mutual funds to make returns higher than those offered by traditional alternatives like FDs. This change in approach towards investment is evident from the confidence of over 6 cr. retail investors who are estimated to be invested in equities, either through stock markets or through mutual funds route. While investment in stocks is still at a nascent stage, mutual fund investments have seen a huge surge in recent years.
According to AMFI data, a total inflow of over Rs 1.7 lakh crore in equity-oriented mutual fund schemes was registered in 2017-18. Systematic Investment Plans (SIPs), regarded as the best route to accumulate wealth due to compounding, also witnessed a growth of 70 lakh, taking the total of SIP accounts to 2.05 crore in FY 18. Though these figures are heartening to see, the current market volatility may act as a dampener to this ascend. The turbulence that the market is experiencing has started playing with investors psyche. Many are contemplating to stop their SIPs to contain erosion in the value of their investments. But would that be the right strategy? The answer is NO.
Let us tell you why.
It’s the herd mentality
It has been statistically proven that the investors follow a herd mentality. They tend to make irrational and illogical decisions with their investments especially when there are frequent upward or downward movements in the market. It is important to understand that the market performance is influenced by a number of variable factors, which in many instances are beyond the comprehension of a common investor. Change in market conditions may not lead to change in the fundamentals of the company that your mutual funds invest in. Without conducting a due diligence, following the herd is not a prudent decision. It is advisable to exercise patience instead of panic and to continue with your SIPs. It is an established fact that investments held for long periods tend to exhibit lower volatility than those held for shorter periods. The longer you invest, the more likely you will be able to weather lows in the market.
Rupee cost averaging works in your favor
Market volatility is a friend if you are approaching your mutual fund investments via the SIP route. Just because the market is moving in one direction does not mean that it will not change its direction sooner or later. Investors can actually capitalize on the market movements by buying more units when the market is down and selling few units when the market is high for the same amount invested. This strategy not only reduces the average cost of investing but also helps to maximize returns. Let us understand this with the help of below scenario with a SIP of 5000 per month
It clearly shows that an investor exiting the market at the end of 3 months incur a higher average cost as compared to investing for 5 months. Thus over 5-10 years, an SIP investor would build a robust portfolio at various price points, helping him earn better returns without going through pains of committing a large sum at one go and witnessing volatilities in his portfolio’s value. SIP method of investing helps the investors participate in the growth story by spreading his investments evenly over the year at the frequency of his choice and amount as low as Rs 500 per month
As professional fund managers exercise this market intelligence on behalf of mutual fund investors, the investors do not have to worry about timing the market.Hence, it makes sense to continue your SIPs in volatile markets. In fact, investing some lump sum amount during down times could give an extra edge to your long-term wealth creation.
Financial planning is all about chasing goals, not markets
The first step to make wise investment decisions is to set goals. The goal setting exercise helps to select the right instruments and allocate adequate resources for achieving the targets. However, it has been observed that market volatility often make investor to lose the sight of their goals. The desire to play the market often leads to imprudent financial decisions. Even in case of mutual funds investment, when the markets are doing well investors buy more units to have a share of the pie and offload the units when the markets are going down. This tendency derails the investors from their financial path. It is important to keep your investment goals at the core and stick to the plan without getting swayed by the market noise. It is only by keeping your eye on the prize that you can avoid all the diversions and work single-mindedly to make all your financial dreams come true.
The disciplined approach towards investment inculcated by SIPs is imperative to achieve financial goals. In fact, the decision to start an SIP itself puts an investor on the path to financial prosperity. The key to make this approach towards investment work for you is to stay focused, avoid unnecessary churning of your portfolio and sticking it for a long-term.