While retail investors have shown a lot of maturity when it comes to sticking to their systematic investment plans (SIPs) and new investors have started investing during this volatile period of the market, many may look to book profits now given the market swings. However, experts say that market volatility does come and go but when an SIP is left unattended, it will have the best desired outcome for them.
Despite the volatility in the equity markets, inflows through SIPs have remained robust. Monthly SIP contribution touched an all-time high of Rs 12,693 crore in August, the fourth consecutive month to cross the Rs 12,000-crore mark. And mutual fund SIP assets under management (AUM) clocked 16% of the overall AUM of Rs 39.33 trillion.
Do not redeem SIPs in panic
Unlike previous market corrections, SIP investors in mutual funds are not in panic this time. Santosh Joseph, founder and managing partner, Germinate Investor Services, says investors continue to stay put and continue to do fresh SIPs even in volatile markets knowing fully well that it is an ideal ground for SIPs to do well, and over a period of time when the market volatility is done away with, SIPs reward them very handsomely.
Investors must understand that markets are supposed to be volatile — it’s their nature. No one knows what the top and bottom are. Varun Fatehpuria, founder & CEO, Daulat, a new-age, wealth-tech firm, says it is very difficult to predict how the markets are going to perform in the short term. “Investors should not give into the temptation of booking early profits. Rather they should stay invested to let their investments compound over long periods of time,” he says.
In fact, investors are often motivated to book short-term profits when markets are going through a downturn. This leads them to ‘buying high and selling low’ – the exact opposite of what they should be doing. “SIPs are a good way to curtail that psychological behaviour by letting investors invest regularly. True wealth creation in the markets comes from spending time in the market, not by timing the market,” says Fatehpuria.
An investor should take the money out only when his goal is closer or if there is a need that arises because of which he started the investment. This should be the primary reason and not because of market volatility or how much your portfolio is up or down. Investors must note that starting an SIP at the top of the market immediately after the next slump may lead to bad SIP. In such a case, investors will be tempted to stop the SIP or redeem the units and lose the money.
Take advantage of the volatility
An investor always benefits by investing in an SIP while the market is volatile because of the benefit of rupee cost averaging. In fact, SIPs by very definition are supposed to help investors ride out the market volatility by helping them buy more when markets are down and vice-versa thereby lowering their overall cost of acquisition over time through rupee cost averaging. Investors should stay invested for over five years so that the investment moves over a few market cycles. In fact, an SIP is good for those new investors who do not want to take any risk but want to invest in the equity market.
Experts say over a cycle, where the market is going up and down or at best being very volatile, investors will actually benefit a lot from not buying at one high price or one low price but ensuring the average cost is much better. “What is even more important is the discipline and the ability to automate saving. You add rupee cost averaging, along with that a layer of automation of investment and the discipline that happens when you invest through SIP, you get a multipronged benefit,” says Joseph.
So, by investing in a disciplined manner and with a goal-based approach, investors can avoid the pitfalls of trying to time the market. Investing through SIP is a good way to build a long-term portfolio. One should not stop SIPs and rather add more during volatile phases or market downturns.
Volatile markets are an ideal ground for systematic investment plans (SIPs) to do well
Investors should stay invested for over five years so that the investment moves over a few market cycles
True wealth creation in the equity markets comes from spending time in the market
Rupee cost averaging, along with automation of investment & discipline happens via SIP