Systematic Investment Plans (SIPs) disciplined approach to investing helps investors stay invested over the long term and benefit from rupee cost averaging. However, with markets being inherently volatile, a common dilemma faced by investors is whether to continue their SIP investments during periods of major market fluctuations. Here is a detailed look at how market ups and downs can impact SIP investments:
Understanding market volatility
Volatility refers to wide price fluctuations in financial markets over a given period of time. This could affect mutual fund investments too. Markets tend to go through cycles of booms and busts, with equity markets in particular prone to bouts of high volatility. This volatility is driven by various domestic and global macroeconomic factors, industry-specific events, company performance and investor sentiments.
During times of high volatility, stock prices swing wildly, and the indices make sharp upward and downward movements over short spans of time, increasing uncertainty in the markets. On the other hand, low-volatility periods see relatively modest and consistent market movement.
Impact on SIP returns
When markets are highly volatile, the returns from mutual fund investments are also likely to fluctuate significantly. Consider an investor who has been investing Rs 10,000 per month through SIP in an equity fund for the past couple of years.
In a low volatility market, the SIP in mutual fund returns is likely moderate but consistent. However, in a turbulent market, the returns could vary widely from -5% in one month to +15% in the next month. The overall long-term returns for the SIP investor may still be decent, but the interim monthly returns will reflect the volatility.
Rupee cost averaging
This phenomenon is called rupee cost averaging. By investing a fixed sum at regular intervals, SIPs help investors buy more units when prices are low and fewer units when prices are high. This averages out the purchase cost and mitigates the impact of market volatility on the investment over the long term.
Benefits of continuing SIPs
Experts almost unanimously agree that investors should not discontinue their SIPs during periods of market volatility. Here are some benefits of persisting with SIPs.
• Rupee cost averaging allows investors to capitalize on low valuations during market falls
• Helps avoid the risk of exiting investments at the wrong time
• Instills investment discipline and long-term perspective
• Power of compounding magnifies returns over long tenure
• Achieve financial goals through vision, commitment, and patience
Consider increasing SIP amount
In fact, several investment advisors recommend that investors increase their SIP contributions when markets are down. This strategy allows investors to accumulate more units and multiply gains when the recovery happens.
Young investors with a high risk appetite and long investment horizon should enhance their SIP contributions to capitalize on major market corrections and crashes. Even a small increment of 10-20% in the SIP amount can make a difference over long tenures of 15-20 years.
Avoid lumpsum withdrawals
While continuing SIPs during volatile times is advisable, experts strictly advise against making any lumpsum withdrawals from equity funds. Withdrawing investments when valuations are low leads to ‘booking’ losses and disrupts the averaging process. It also hinders wealth creation in the long run.
Conclusion
Market volatility is an intrinsic part of investing in equities. While volatility does impact SIP returns in the short term, the long-term wealth creation potential remains intact. Rupee cost averaging, power of compounding, discipline and patience are key to harnessing the benefits of SIP investing across market cycles. Instead of stopping SIPs, investors should utilise an SIP calculator and continue with their plan uninterrupted, or even consider increasing SIP amounts during market declines. Having a long-term outlook and reasonable expectations is vital for meeting financial objectives through SIPs.
(No Hans India Journalist was involved in creation of this content)