Why is it Important to Not Stop Your SIP in a Volatile Market?
November 02, 2020
Systematic Investment Plan (SIP) is a benefit provided by Mutual Funds to invest in a disciplined manner. Through SIP, investors can invest a predetermined amount of money at chosen regular intervals. The fixed amount of money can range from being as low as Rs 500 and the intervals can vary from being weekly to annually. SIP permits us to buy units on a fixed date every month. By following the SIP pathway of investing, investors remain relatively immune to the changes in the market.
Let us have a look at why you should not stop your SIP in a volatile market.
Market Timing: Many investors feel inclined to time the market. However, research indicates that a disciplined investor with SIP gets higher returns than the one who times the market. SIP does not require you to time the market and this is one of its biggest benefits. When you time the market, there is a high possibility that you will miss the larger picture. As a result of market timing, you might stay out while the market is performing well or may enter when market performance is poor.
SIP averages out the benefits and hence, reduces the risks posed by market timing.
Rupee Cost Averaging: As a concept, rupee cost averaging means averaging out the price at which you purchase units of a Mutual Fund. In contrast to a lump sum investment in which a specific number of units are bought by the investor all at once, in SIP the purchase of units is done over a long period of time at regular intervals.
SIPs offer you the advantage of rupee cost averaging. Rupee cost averaging is an investment method which is applicable to periodic definite instalments in a Mutual Fund scheme. As the instalment amount is fixed and regular, more units are purchased when the market price of shares is low and less units are bought when the market price of shares is high. This process allows the investment risk to be spread across a spectrum of market dynamics.
Long Term Returns: SIP is best for long term financial planning. Over the last several years, SIPs have produced huge returns as they could enter markets at both low and high phase. When you invest in Equities through the SIP mechanism, you should not limit yourself to short term financial goals and monetary returns. Equities have the capacity to provide inflation adjusted returns in the long run. Hence, when you stop your SIP during the phases when the market is volatile, you are missing out the larger scenario.
Power of Compounding: Power of compounding is a beneficial aspect of SIP. What does power of compounding mean? Knowing the difference between simple interest and compound interest is the key to understanding the advantage of this mechanism. Simple interest means acquiring interest only on the principal amount. On the other hand, in compound interest, interest amount is added to the principal amount and interest is calculated on the resultant new principal. As the Mutual Funds in the SIP are in instalments, they get compounded and hence, increase the invested amount.
Affordability: The monthly instalment amount required for SIP is as low as Rs 500 and hence, SIPs are an affordable investment option.
A look at the above reasons tells us that SIP investment is a smart option of financial planning and Mutual Fund investment. You should continue your SIP investment, irrespective of the condition of the market as SIP minimises the risks posed by a volatile market.
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