How does SIP help investors in volatile markets?

The 2020 pandemic is a clear example of how markets can be volatile over the short term. The sudden setback faced by economies across the globe caused a sudden chaos across sectors and industries. A lot of investors under the influence of panic sold their investments fearing that they might suffer further losses. But those who held on to their investments and booked profits when the markets normalized, they were the ones who remained patient and did not let emotions get in their investment decisions. The point we are trying to make here is that market volatility will always affect your investment portfolio and when the markets are low, investors should not rush to sell their investments but instead remain patient.

Markets will always remain volatile however, the volatility cycle keeps changing. If you want to benefit from volatile markets, then you can consider investing in mutual funds via SIP.

In this article we are going to tell how investors can benefit from volatile markets by starting a mutual fund SIP.

How does SIP help in volatile markets?

Systematic Investment Plan (SIP) is one of the two mutual fund investment options, other being lumpsum investing. In SIP all an investor has to do is decide how much to invest in mutual funds and decide a date to invest. After this, every month on that date the predefined SIP sum is debited from the investor’s savings account and electronically transferred to the fund. This is a simple and easy way to ensure that you save and invest a fixed amount every month.

A lot of investors try to time the market before entering but with SIP one can invest at any time. That’s because SIP actually allows investors to take advantage of market volatility. When the markets are underperforming and the NAV of a mutual fund is low, investors will receive more units. In the following month, if the markets normalize this will automatically increase the per unit value of the mutual fund scheme. During this time, since the SIP sum will remain the same investors will receive lesser units. This fluctuation in allotment of units in quantum with the shift in NAV is referred to as rupee cost averaging.

To beat market volatility, one must continue investing via SIP

We spoke about rupee cost averaging in the above paragraph and we are going to use an example to help investors understand how this investment technique can actually help them take advantage of falling markets.

Let’s take for example you start a monthly SIP of Rs. 10,000 and you intend to remain invested with the same sum for the next 6 months. Let us see how a change in NAV will vary cause a direct impact on the number of units allotted every month.

Here’s a table that shows how change in the NAV can help investors benefit –

MonthNAVUnits
January50200
February55181.81
March45222.22
April60166.66
May40250
June45222.22

In the above example one can clearly see that whenever the NAV of the scheme went down, investors received more units.

Total sum invested – Rs. 60,000

Total units received – 1249.91

NAV at end of the tenure – 45

Value of investment – Rs. 62,495.5

Profit earned – Rs. 2,495.5

The above example shows how SIP reduce the average cost of purchase of units. If you had to purchase 1249.91 units at in January it would have cost Rs. 2,495.5 more.

This is why more and more investors are opting for SIP these days as they even get to benefit from falling markets.

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