SIP - A Powerful Tool Against Market Volatility
If you are new to investing in Mutual Funds, you might have heard of terms like market timing, SIPs, and cost-averaging and ended up in a fog. Worry not. Here’s a quick read to help you understand how SIP is a powerful tool against market volatility and how to leverage it, to make the most out of your investments.
What makes the market volatile?
- International Factors: The global economy is highly integrated. When there’s any big event in one part of the globe the other parts feel its ripple effects, including the financial markets.
- Policy Makeovers: The markets run on rules and regulations laid down by economic policies. So even a small change in the existing policies by the policymakers can impact the ongoing market scenario and redirect the path.
- Industry Influence: Certain movements in a particular industry can cause all the companies in it to move or deviate from a predicted trajectory and eventually make the prices fluctuate.
- Company-oriented deviations: Distinct events of a company like a major change in the board or workers’ strike can also affect the company and the industry at large, swaying the market as a whole.
To name them these are a few factors out of many which are beyond anyone’s control and can happen unexpectedly. The impact of these factors can be reduced to insignificance by maintaining long-term investment strategies and ignoring short-term fluctuations.
What is a Systematic Investment Plan (SIP)?
The strategic approach where a pre-decided amount is invested consistently in Mutual Funds is known as a SIP; an acronym for Systematic Investment Plan. The backing of sheer discipline and the principle of rupee cost averaging makes this practice useful in a volatile market. SIPs are known to have good flexibility, accessibility, and affordability as an investment avenue.
What are the benefits of SIPs in a volatile market?
Systematic Investment Plans provide a designed approach to analysing financial needs and making investments to fulfil them in time. Listed below are the factors that make SIP sail stronger through the turbulence of financial markets:
- Harnessing Rupee Cost Averaging:
SIP is based on the phenomenon of consistent investment at timed intervals, irrespective of market conditions. This enables investors to buy more in the bear market and less in the bull market. This aggregation and averaging over time reduces the possibility of loss in market timing, decreases the average cost of investment and sways one towards attaining better ROI.
- Utilising the Power of Compounding:
SIPs employ the potency of compounding in a simplified way making it easy for investors to stay consistent and build wealth over the long term. Compounding, here, simply means reinvesting the returns of investments and repeating it to build further earnings. This method significantly impacts the investment and helps a modest amount, invested consistently, become a substantial corpus in the long term.
- Making Investments Convenient:
SIP is the most accessible and adaptable investment avenue with a simple process leading to substantial returns. It’s well-suited for those who are new to investing, do not want to actively manage funds and/or want to build wealth without a lump sum in hand. The real magic of SIP is that it instils a financial discipline with a habit of saving and investing for life.
Thus, SIP not only beats the market turbulence with its equanimous traits but also helps investors build wealth with small consistent investments in the long run.
Disclaimer: The information contained herein is only for information and does not constitute, and should not be construed as investment advice or a recommendation to buy, sell, or otherwise transact in any security or investment product or an invitation, offer or solicitation to engage in any investment activity. Mutual fund investments are subject to market risks, read all scheme-related documents carefully before investing.