SIPs should not be treated as an instrument to time the market. Many investors stop SIP thinking that the market has hit the peak.
Investing requires discipline and careful planning. People prefer to invest in stocks due to the potential for better rewards, but not everyone is lucky to find multi-baggers. When it comes to investing, an investor is walking tightrope due to vast stock universe. Asset allocation plays an equally important role in determining the success of the investing strategy. However, stocks are a risky proposition due to their volatile nature. One needs to be vigilant and spend time researching them. A bad decision can wipe out the capital.
Mutual funds, on the other hand, are less volatile and risky. They have proprietary risk management systems which help them to mitigate risk. Even a medium-size fund holds anywhere between 50 and 70 stocks. This enables them to achieve diversification. They also have a research team that tracks the stock’s performance, something which the average investor does not have.
Mutual funds are ideal for retirement planning or similar medium to long-term goals. The concept of SIP has revolutionized investing. It is possible to accumulate a decent corpus with regular small investments. Systematic and staggered investing has multiple benefits. A person can invest according to his income flow. This reduces the pressure of beating the markets. SIP helps the investor to achieve his financial goals without worrying about volatility.
A majority of retail investors have a knack for picking poor quality cyclical stocks. Instead of building a quality portfolio, they purchase stocks through SIP with the expectation of finding a multi-bagger. A SIP in a mutual fund ensures that the capital grows steadily over the years. The idea of SIP is to protect one’s investment from volatility. SIPs should not be treated as an instrument to time the market. Many investors stop SIP thinking that the market has hit the peak. This is wrong. It is difficult to predict the top or bottom of the market, besides markets can remain elevated or undervalued for a long period of time. If markets witness volatility and correct by 20-25%, one can invest in a lump sum to take advantage of volatility. SIPs help you to remain disciplined with your savings.
SIPs are not foolproof, it is possible to see negative returns even while you are investing. Suppose you started SIP in NIFTY 50 in 2015. The 5-year SIP returns would be in negative territory. i.e. 7.9% IRR (internal rate of return) when the markets witnessed historic volatility in March 2020. But if you held your SIPs for another 5 months, you would have a positive IRR of 6.1%. The dip, however scary, is only a temporary phenomenon
A study was conducted by AMCs to identify the return differential between the worst and best days in a month. Ironically the difference between investing low and high was just 30 bps. This means that by trying to time the SIPs, the investor risks disrupting his savings. SIPs help when you do not have a large lump sum amount in hand. It helps you to sync well with your cashflow. By investing small amounts spread over a period of time can help you to accumulate wealth.
Remember, mutual funds are not meant to buy low and sell high. In simple terms, they can be explained as ‘invest when you have money and divest when you are in need of money.’
One should seek the help of a good financial advisor while investing their hard-earned money to avoid erroneous decisions.
(By Abhinav Angirish, Founder, Investonline.in)