What is a Systematic Investment Plan?
SIP or systematic investment plan allows you to invest a fixed amount each month into the mutual fund schemes of your choice. While the most common form of SIPs is via monthly payments, there are also weekly, or quarterly SIP frequencies available. SIPs work by automatically investing a pre-decided amount on a fixed date every month into a certain scheme. The benefit of SIPs is that they allow investors to start small with an aim to accumulate capital over time without too much hassle.
Globally, markets may underperform for the next few months due to the wide-spread panic caused by the COVID-19 pandemic. With the ongoing pandemic, many investors may choose to cash out of their investments and shift towards non-market linked financial tools. India’s economic prospects for 2020 also appear to be challenged by the pandemic hitting the nation. However, is market volatility the ideal time to discontinue one’s SIPs?
Advantages of SIPs during Market Volatility
If you have invested via a SIP in a mutual fund scheme that is aligned with your financial goals, then you do not have much to worry about during a financial crisis. SIPs could make volatility work in your favour. Here’s how:
- Rupee Cost Averaging:
Foremostly, they offer the advantage of rupee cost averaging. This means that with an unchanging amount of investment on a regular basis in a mutual fund, you can average out the cost of your purchase. The benefit of rupee cost averaging is that when markets are at a low, you have more units. Once the market performs well, you have fewer units.
SIP investments allocate a fixed amount to a scheme. Units are received against the Net Asset Value (NAV) of the scheme. The NAV of mutual funds remains low during such lower markets. Investors should consider remaining invested in their funds as more units could be purchased when the market is underperforming. Lower markets can also be viewed as an opportunity rather than a setback. Additionally, investors can choose to start new SIPs during the low phase as this can help them get better value . By averaging out your cost during market volatility, SIPs aim to reduce the overall cost of acquisition. Hence, SIPs could help achieve the thumb rule of markets which is to buy less when markets are high and buy more when markets are low.
- Compounding Benefits
By remaining active over a long period of time through cycles of market volatility, SIP investments harness the power of compounding. Even an amount as small as ₹5000 per month can amass a sizeable corpus after a few years’ time. This is known as the compounding effect. For instance, if you invest ₹5000 using a SIP investment every month in a scheme with a conservative 8% annual return, you will amass ~₹30 lakhs in 20 years’ time. In case you are lucky enough to receive a more generous annual return of 11% then you will amass ~₹60 lakhs in 20 years.
Please Note: The above figures are used only as an example for illustration purposes. The Actual performance or returns may vary.
- Hassle-Free Investments
With compounding and averaging on its side, a SIP makes for a great investment option for beginners without much knowledge on market conditions. However, there is a third advantage that SIPs offer investors. They are hassle-free. SIPs require little to no trouble to set up. By investing a fixed amount each month, investors learn the patience and discipline of time-bound investments. They do not need to initiate investments manually as SIPs are linked to one’s bank account.
By virtue of being automatic, SIPs are set up to make for convenient long-term investments that go through repetitive cycles of volatility. They are accessible to more people, including those who do not have knowledge about trading. Investors do not require a Demat account to invest in mutual funds via a SIP. Hence, an SIP is an extremely convenient investment option. Unlike traders scrambling to sell their securities during volatile conditions, mutual fund investors can sit back and relax as their investments could weather the current market conditions.