SIP investments allow an investor to be disciplined as a fixed sum is put in every month irrespective of the market condition
The last few months have been very volatile for Indian and global equity markets. Benchmark indices such as the Nifty 50 and NASDAQ Composite are down close to 7 per cent and 25 per cent, respectively, in the current calendar year (as on May 10). The situation was opposite just a few months back when the market was scaling new highs every other day, after the initial shock of the pandemic waned.
The sharp change in market behaviour has led to anxiety among investors, especially new investors. Now, such investors are deliberating if it is time to sit out and wait for the correction to be over before deploying fresh money. However, there were a set of investors who, during the market rally, believed that the bull run seemed too good to be true and that the market could reverse any day. So, they decided to wait out the last leg of the rally seen before the turbulence began.
It is quite likely you may be an investor who has gone through at least one of the two scenarios. So, what should you do in such situations? The answer lies in Systematic Investment Plans or SIPs.
What Is SIP?
It is a systematic way of investing. Here, you can invest a fixed amount in a mutual fund scheme of your choice periodically, and the amount would automatically be debited from your bank account and be invested. The amount can be as small as Rs 100. If you have a lump sum amount, then the optimal approach would be to break the amount into smaller fragments and then invest. For example, say, Priya receives an annual bonus of Rs 5 lakh. Since she has no immediate need for the money, she decides to allocate it towards her long-term financial goals and opts for an equity mutual fund. But given the volatile market conditions, she is worried about capital erosion. In such a situation, she can consider investing Rs 50,000 each month through SIP over the next 10 months so that there is no adverse impact on the investment even if the market corrects during this period.
Benefits Of SIP
Inculcates Financial discipline: Emotions play a critical role in our investment decisions. When the market is at a low or hitting new highs, many investors are either too wary and exit the market or rejoice and invest more in a booming market. By investing through an SIP, an investor is disciplined by investing a fixed sum every month irrespective of the market condition. So, SIP negates the role of emotion in investing.
Facilitates Rupee Cost Averaging: An investor gets to buy units at varying prices in an SIP. When the investment is made in a falling market, the cost gets averaged to a lower point and the number of units allotted increases. In a rising market, the cost gets averaged to a higher point and the units allotted decreases. This is why it is important to stay invested across a complete market cycle. In effect, investing via SIPs leads to an averaging effect on your overall investment cost.
Market Monitoring and Learning: Apart from being disciplined in savings, an investor gets to see and learn how markets are affected by various developments which could be domestic or international in nature. As a result, over time, you will learn to make better investing decisions in terms of new funds to invest in.
Flexibility in Investing: As seen through Priya’s example earlier, an SIP provides flexibility in terms of investment amount and tenure. You don’t need to wait till you accumulate a big amount to start.
To conclude, no matter what your income is, invest through an SIP with a long-term view. You are likely to be surprised by the positive result in the medium to long term. If you don’t have an SIP yet, consider starting one, today.
By Amit Marwaha, MD, Marwaha Holdings Pvt. Ltd.