Mutual Funds

Continue with SIPs in a volatile market

Sundeep Sikka | Updated on October 06, 2019

The plan mitigates timing risk, as investments are made automatically at fixed intervals

A majority of retail investors who started investing over the last few years, have been experiencing negative returns in their portfolios. Markets have been going through a volatile phase, amid fears of an economic slowdown, global trade wars, geopolitical tensions, NBFC liquidity crisis, etc. and investors’ confidence in the Indian market is being tested.

While growth in the monthly SIP inflows has been phenomenal over the past few years, it has moderated significantly during the last few months. However, even sustaining such inflows can be seen as an excellent achievement for retail investors, who reflect a sense of maturity in their investing approach.

Amid this volatility, while you might question yourself whether to stop or go ahead with your SIPs, you can continue to trust the market for long-term wealth creation.

Investors need to appreciate that the volatility is not an exceptional phenomenon in the market and should instead be seen as an integral ingredient to make it healthy.

Tide over market volatility

As such, investors must try to make the most of such opportunities by continuing to invest in a volatile market. SIP, in fact, can be a great tool to tide over such volatility.

When the market is down, it fetches you more mutual fund units. And when it is up, you benefit from a higher portfolio valuation, even if there are fewer units for regular investments.

For example, you invest ₹10,000 on a monthly basis. During the first month, when the NAV is ₹20, you get 500 units. However, during the next month, the market falls, with NAV reaching ₹16. So, you would receive 625 units. This helps you ride the market volatility wave by averaging your cost of investments in the long run.

Similarly, what you are currently experiencing is the market-timing dilemma — whether to invest now at reasonable valuations or to wait further for lower prices and then invest. However, waiting for the right time may result in the postponement of your investments, and you might miss the upside, when the market recovers and rallies further.

SIP helps you mitigate the timing risk, as investments are made at fixed intervals automatically, without considering the market direction. On the contrary, if you plan to stop your SIPs now, during the falling market especially, you may miss out on an opportunity to average your cost of investments by making investments at lower valuations.

A healthy corpus

SIP can also help you save consistently towards your financial goals. For example, small investments of ₹3,000 per month can help you accumulate ₹1.06 crore over 30 years (assuming the investments generate 12 per cent returns every year).

It is often said that your worst enemy in the stock market is not the market volatility but your own emotions such as fear and greed. When the market is falling, the fear of losing more capital tends to grip us, pushing us to redeem existing investments and stops us from making new investments. This not only results in booking a loss on existing investments, but also deprives us of potential gains from investments made at lower valuations. Similarly, during market rallies, the ‘Fear of Missing Out’ (FOMO) syndrome makes us invest more in the market.

As such, emotional bias often results in buying at high valuations and selling low. With SIPs, the investments are made automatically at fixed intervals. They help you accumulate savings over time and in the process, eliminate emotional biases while making investment decisions.

It is not the time to doubt the long-term wealth creation potential of equity market, but to stay patient with your investing strategy and continue making regular investments through SIP.

The writer is ED & CEO, Reliance Nippon Life Asset Management Limited

Published on October 06, 2019

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