Equities have proven to be one of the most effective asset classes for long-term wealth creation. If you are considering investing in this asset class to achieve your financial goals, Mutual Funds can be a sound option due to their numerous benefits, including fund manager expertise, diversification, and liquidity among others.
An important characteristic of the equity asset class is its non-linear performance. It is inherently volatile and uncertain, characterised by cycles of uptrends and downtrends. To navigate this volatility effectively and maximise returns, it's worth exploring the concept of a Systematic Investment Plan (SIP) in Mutual Funds. In this article, we will explain how SIPs can help mitigate volatility and facilitate the compounding of investments over a longer time period.
Decoding Systematic Investment Plan (SIP)
SIPs help you invest in Mutual Funds in a systematic manner, allowing you to invest a fixed amount of money at regular intervals. Just like planting seeds in a garden requires consistent effort and you sow them gradually over a period of time, SIPs help you invest small amounts consistently to build wealth over time. In essence, it's an investment method provided by mutual funds allowing you to spread out your investments over regular intervals. You commit to investing a set amount of money at scheduled frequencies such as weekly, monthly, quarterly, and so forth.
Benefits of a Systematic Investment Plan
- Rupee cost averaging: SIP works on the principle of rupee cost averaging. Instead of investing a lump sum amount at once, you need to make regular investments (monthly, quarterly, etc.). This spreads out the investment over time, allowing you to buy more units when prices are low and fewer units when prices are high. In fact, it reduces the impact of market volatility on the overall investment.
- Low ticket size: One of the most attractive features of SIP is its accessibility. SIPs have a low minimum investment amount and they enable all types of investors to participate in the market systematically.
- Convenience: Once set up, investments are automated periodically, requiring minimal intervention. This not only saves time but also decreases the need for frequent market monitoring.
- Negate market timing: Timing the market perfectly is exceedingly challenging, if not impossible. However, SIPs alleviate the necessity for precise timing by embracing a consistent investment approach. By investing regularly, you can benefit from the power of averaging, regardless of short-term market fluctuations.
- Instil discipline: Consistency is key to wealth creation. SIPs instil discipline by requiring you to make regular investments regardless of market conditions. This systematic approach prevents extreme fear or greed, building a long-term investment mindset.
How can SIPs help in beating market volatility?
Let's consider an illustration to understand how SIP can lower the impact of market volatility:
Month |
Monthly Investment |
NAV |
Units purchased |
01-Jan |
10,000 |
15 |
667 |
01-Feb |
10,000 |
16 |
625 |
01-Mar |
10,000 |
14 |
714 |
01-Apr |
10,000 |
12 |
833 |
01-May |
10,000 |
11 |
909 |
01-Jun |
10,000 |
9 |
1111 |
01-Jul |
10,000 |
8 |
1250 |
01-Aug |
10,000 |
10 |
1000 |
01-Sep |
10,000 |
12 |
833 |
01-Oct |
10,000 |
14 |
714 |
01-Nov |
10,000 |
16 |
625 |
01-Dec |
10,000 |
15 |
667 |
Total Investment |
1,20,000 |
Total units accumulated |
9949 |
For illustration purpose only. Actual results may vary.
Suppose you initiate a monthly SIP of ₹10,000 in a Mutual Fund. In the first month, the NAV (Net Asset Value) of the fund is ₹15, allowing you to purchase 667 units (10,000/15).
Due to market volatility, the NAV drops from ₹16 in the second month to ₹8 in the seventh month, enabling you to accumulate more units during this period.
When the market eventually rebounds, you benefit from the accumulated units at lower NAVs, resulting in substantial gains once the NAV rises. This illustrates how SIPs capitalise on market volatility by accumulating more units during difficult times, ultimately leading to significant wealth creation in the long run.
Also Read: How to invest in a Systematic Investment Plan (SIP) - 6 easy steps
Bottomline
SIP stands as a reliable and effective strategy for benefiting from the equity asset class. With advantages such as rupee cost averaging, compounding benefits, accessibility, and discipline, SIPs offer a steady approach to wealth creation. They provide a pathway toward long-term financial success. Initiating a SIP in a mutual fund is a simple and convenient process, easily accessible through Axis Bank’s internet banking and mobile banking platforms.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
Mutual Fund investments are subject to market risk, read all scheme related documents carefully. Axis Bank Ltd is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Purchase of Mutual Funds by Axis Bank’s customer is purely voluntary and not linked to availment of any other facility from the Bank. T&C apply.