Why SIPs are your best bet in a volatile market

4 MinsSeptember 18, 2019

If the turbulence and volatility in the equity markets are causing you anxiety, don’t worry. There are strategies you can adopt to approach equities in these volatile times and even benefit from the opportunity.

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Going all out and buying stocks directly may not be in the best interest of your long-term financial wellbeing, particularly, if you are not well-versed with the nitty-gritties of stock picking. Taking the SIP (Systematic Investment Plan) route and investing in best-performing equity mutual funds will be prudent and prove to be a beneficial experience. Existing SIP investors can look to get good rewards by sticking with their investments when the market is correcting, or witnessing wide fluctuations.

Since July the S&P BSE Sensex has corrected and on a year-to-date basis the absolute return posted is a mere 3.6%. The S&P BSE Mid-Cap and S&P BSE Small-Cap indices, which witnessed a pre-election and pre-budget rally, have tumbled down. And valuation-wise, Indian equities are relatively inexpensive providing a decent margin of safety with worthy buying opportunities.

If you wish to compound your money over the long-term, here’s a strategy to follow.

SIP enables rupee-cost averaging:

‘SIP-ping’ into worthy mutual fund schemes is a strategy to mitigate the market volatility with the rupee-cost averaging feature of SIPs while you endeavour to compound your hard-earned money to accomplish the envisioned financial goals.

[Read: How SIPs Can Help You Accomplish Your Financial Goals]

With rupee-cost averaging, you would typically buy more mutual fund units when prices are low, and similarly, buy fewer units when prices are high. So, in a way SIPs infuse a good investment discipline since it forces you to commit cash at market lows when other investors around you are wary and exiting the market, and vice versa. The average cost of your investments is reduced and potentially it translates into higher returns.

Since it is expected that equity markets could be volatile in 2019 and beyond –– owing to the challenges in play for the domestic as well as global economy –– the SIP route is one of the best options. Hence, if you are already investing via SIPs, please do not discontinue or stop SIPs; stay put ––continue investing!

Do note that when markets are in a correction phase, SIPs work the best. Similarly, even flat and volatile market phases are good to SIP into mutual funds. And when the markets move up, your SIP instalments will buy fewer mutual fund units, but the pace of wealth creation will accelerate provided you own the best mutual fund schemes.

No need to time the market:

SIPs make timing the market irrelevant. Always bear in mind that, when it comes to equity investing and wealth creation, what matters most is ‘time in the market’ and not ‘timing the market’. The latter could prove to be hazardous to your wealth.

That being said, SIPs do not allude to be a safe investment plan. Mutual funds investments do not guarantee any returns; unlike bank fixed deposits, the returns in mutual funds are market-linked. That’s why always remember that mutual fund investments are subject to market risks and read all scheme related documents carefully.

Hence, while SIP-ping into mutual funds can prove to a rewarding investment strategy, selecting consistently the best performing schemes is very important.

Want help to pick the best mutual funds to SIP? If you are already investing through SIPs, make sure to review your mutual fund portfolio with an investment expert to weed out the underperformers, because they could hinder the journey of wealth creation.

Be a prudent investor, do not be afraid or deterred by the turbulence in the Indian equity market; make volatility your friend by SIP-ping into equity mutual funds.

In times when interest rates are going down, equity is still a good tool for wealth creation, from a long-term perspective, and aiding the journey towards your financial goals.

If your investment objective is capital appreciation, and you are looking to earn inflation-adjusted returns, have a high-risk appetite and have an investment time horizon of at least 5 years for your financial goals. SIPs in diversified equity mutual funds are a worthwhile option to consider.

In the current scenario, it would be wise to diversify across market capitalisation via multi-cap funds, while holding some proportion of your equity allocation in large-cap funds.

For higher growth with some exposure to mid-caps and if you have a slightly higher risk appetite, you may consider investing in a Large & Mid-cap Fund. And only if you have the appetite for very-high risk and an investment horizon of 8-10 years, you can consider pure Mid-cap Funds and/or Small-cap Funds.

[Read: Types of Mutual Funds]

From a tactical asset allocation point of view, consider Aggressive Hybrid Funds and/or Balanced Advantage Fund and/or Multi-asset Funds.

“To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework." …remember these pearls of wisdom from the book "The Intelligent Investor" by Benjamin Graham, the father of value investing.

Happy Investing!

Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN 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.

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