SIP through volatility
Mutual Fund Basics
In this article you will learn about
- Why stock market volatility is needed
- How SIPs can work favourably during market volatility
- The advantage of staying invested through different market cycles
Investing in mutual funds has undergone a significant shift with the rising popularity of systematic investment plans
(SIP). SIP is a way to regularly invest in mutual funds and not a mutual fund itself, as some people misunderstand it to be. SIP works on a simple idea – you invest a fixed sum regularly in a mutual fund for the number of years you need to reach your financial goal. You follow this disciplined approach regardless of the direction of the market movements. With this approach you will end up buying more number of units when the markets are down and less units when the markets are up.
By investing regularly, you will be disciplined and not attempt to time the market or stop investing when the markets are in a downward phase. This simple approach addresses the biggest challenge faced by investors – stock market volatility. Human behaviour tends to influence investors to stop investing when the markets go down, and in some cases, investors completely exit their investments. Likewise, investors tend to invest more when prices are high. SIPs force you to follow the opposite approach, which is a more profitable way of investing.
It is impossible to predict stock market movements, which is why it is important to invest regularly in a disciplined manner towards your financial goals. Historical stock market data indicates that over long periods, volatility smoothes out, which makes systematic investing effective. There are other inherent advantages of investing through SIPs – you can start with small investments and scale up your SIPs over time. You also automate your investments, which reduces the chance of you delaying your investments.
If you are concerned about volatility, you should know that it is volatility in equity markets that helps build long-term returns. Suppose, there is no volatility and markets move only in an upward direction, it will mean that each SIP instalment will buy in lesser units as the NAV of the fund
will only go up. Market corrections or dips in markets give regular SIP investors to buy more units, thereby averaging the price of your purchase in the fund over time. Instead of focusing just on market returns, you will be wise to systematically and regularly invest towards your financial goal.
When you invest towards a financial goal, you can calculate the monthly SIPs you need to invest in the suitable funds to reach your goal. This approach will check on your emotions and also cultivate the habit of regular investments over market cycles. When you face market volatility, especially when the markets keep sliding downwards, treat the situation as something like a sale. Just as you buy more during a festive sale, you could use the falling markets as an opportunity to invest more. If you observe seasoned investors; they stay invested through market downs and ups, benefiting from volatility.
If you look back over the past decade; 2008 and 2011 were periods when there were relatively less returns from investments. But, those who stayed invested through this had a lot to cheer and gain from. Unlike stock market movements, your financial goals pretty much remain the same and that is what you should aim to invest for without overly getting worried about stock market volatility.
Next steps
- Stay invested through SIPs
- Check the performance of the fund you have invested in
- Do not panic because of stock market swings