Ever since September 7, domestic stock markets have been on a roller-coaster ride. After closing at 38,389.82 on the day, the Sensex has been hit by bouts of selling. It briefly tried to recover, but the IL&FS credit fiasco, speculation about a liquidity crunch and an overall bearish sentiment have gripped the minds of most investors. The Sensex closed on Monday at 36,841.60, one of the lowest in weeks.
Many passive stock market investors use the mutual fund route to tap markets. Even, those investors have started thinking whether they should continue investing, or temporarily suspend their equity journey.
Wait! If you are afraid of volatile equity markets, you start looking at Systematic Investment Plans (SIP). If you already do SIPs, do nothing. Read on to know why.
The SIP model of investing is best for somebody who needs 4-in-1 benefits.
One, SIPs are light on your pocket, with a minimum investment of Rs 100-500.
Two, SIPs allow you to do average cost and that to our mind is the biggest advantage. If the market falls by 10% next month, you can buy markets at lower rates with SIP in your next monthly installment. If the market again falls by 5% in the subsequent month, with a SIP you can again purchase the same at that lower cost. The SIP strategy works in both bull and bear markets. Your average cost of holdings improves if you stick to your strategy even during troubled times.
Three, SIP inculcates a strong sense of discipline to the whole investment process. You do not need to depend on timing the market. Being disciplined works to your advantage, especially during volatile times.
Four, by investing in an MF SIP, you outsource your worries. There are professional experts who reduce the risk involved in investments. This work cannot be done by you or me. We are already being chased by our bosses and have too many things on our plate.
If markets shoot up in a straight line, you don’t need a SIP. But markets seldom over longer periods of time go up, and up, and up. There will always be some event, which will pull it down. That is why SIPs are a very practical solution to a common problem — falling markets.
SIPs work wonders. This is because instead of buying at one point in the market cycle, you keep on buying at different points — highs and lows. If you can give a minimum of five years to an MF SIP, chances are high you will see more gains than investing in lump sum mode. Plus, lump sum mode investing is quite risky because you are committing all your investment capital at one point in time.
However, it is sad to note that every time there is a drop in stock markets, investors re-think their SIPs. Some even take the drastic and sub-optimal step of suspending SIPs. They want to take money out, fearing a longer and deeper market correction.
Stopping SIPs at the first sign of correction is totally against the reason why you started SIPs in the first place. How is the fund supposed to buy at lower market levels if the market doesn’t correct? How will you gain more units by investing the same amount if stock prices do not fall?
Yes, stopping or suspending a SIP because of volatile markets is akin to shooting the messenger. You should be happy that a correction has happened because now you can buy more MF units via SIP.
So, stick to your SIPs more when your markets fall.