One of the major encounters that investors’ are facing these days is wide fluctuations in the equity market. The one word on every market participant’s mind is ‘volatility,’ and their first reaction to this volatility is panic. In the last month, the S&P BSE Sensex has declined by nearly 3,000 points, while the broader S&P BSE 500 index is down by around 1,650 points.

Currently, the key concerns include a mix of macroeconomic and geopolitical factors. The ongoing volatility is not attributable to one particular reason; there can be various events that can lead to such swings. Equity mutual fund investors, particularly first-time investors, are looking for safe investment options as market volatility rises due to changes in government policies, interest rate hikes, growing inflation, and the ongoing Russia-Ukraine war that shows no indications of settlement, etc. Going ahead, volatility is likely to continue, given the current headwinds in play.

Volatility is often viewed negatively by investors, which prevents them from investing in equity mutual funds. However, there are strategies you may use to approach equities in these turbulent times and even benefit from the opportunity.

Markets are volatile by nature; for example, if an equity fund has produced positive returns for the past two years, it is possible that the fund would underperform the following year. As a result, volatility is unavoidable. The sooner you accept volatility as a friend and learn to manage it, the better off your investments will be.

We can’t control how these macroeconomic variables affect the market as investors, but we can take action to reduce their impact on your investment portfolio. Investors should focus on the long-term goals of the equities market rather than the enthusiasm or short-term blips.

However, you must be wondering whether there is an easier way to beat volatility. There is a method that can help investors save their wealth from eroding and even out the effects of a volatile market. A Systematic Investment Plan (SIP) remains to be one of the wisest ways to invest in the equity markets to average out the cost of investing over multiple market cycles.

Going all out and buying stocks directly may not be in the best interest of your long-term financial wellbeing, particularly if you are not well-versed with the nitty-gritty of stock picking. Taking the Systematic Investment Plan (SIP) route and investing in best-performing equity mutual funds will be prudent and prove to be a beneficial experience in the prevailing volatile market.

SIP is an ideal way for retail investors to benefit from the power of compounding and create wealth in the long term. Timing the market is not easy; a Systematic Investment Plan (SIP) is the best way to ride out market volatility.

The SIP option allows investors not only to develop financial discipline but also to mitigate the effects of various market cycles. SIPs are a simple and time-tested way to build wealth while also having the benefit of averaging.

Benefits of SIP investments in volatile market scenarios:

  • Rupee-cost Averaging

    When you invest through SIPs, you commit to investing a set amount each month on a pre-defined date. Based on the SIP amount invested and the day's NAV, you are allotted a certain number of units of the fund.

    This implies you can average out the cost of your purchase by investing a consistent amount in a mutual fund on a monthly basis. You would normally buy more mutual fund units when prices are low and less units when prices are high using rupee-cost averaging. SIPs instil strong investment discipline in particular because they force you to commit funds at market lows when other investors are wary and exiting the market, and vice versa.

    SIPs strive to lower the overall cost of acquisition by averaging out your costs amid market volatility. As a result, SIPs may assist in achieving the market's thumb rule of buying less when markets are high and more when markets are low. The average cost of your assets is lower, which could result in larger returns.

    Let's understand this with the help of an example:

    For instance, you invest Rs 5,000 every month in an equity-oriented mutual fund. Assume that during your investment period, the markets were volatile for the initial months in a year.

    Months SIP Amount (in Rs) NAV (in Rs) Units received
    January 5000 15 333.33
    February 5000 20 250
    March 5000 23 217
    April 5000 18 278
    May 5000 12 417
    June 5000 19 263
    July 5000 22 200
    August 5000 25 185
    September 5000 16 313
    October 5000 10 500
    November 5000 12 417
    December 5000 20 250
    Total 60000 3665

    This example demonstrates how rupee-cost averaging can help investors beat market volatility with SIPs. As aforementioned, the fund's NAV peaked in August at Rs 25 per unit. You would have earned just 2400 units (Rs 60,000/Rs 25) if you had deposited a lump sum payment in August at a higher NAV of Rs 25.

    Thus, volatile markets can also be viewed as an opportunity rather than a setback. By staying invested via SIPs in turbulent markets, we can buy more units, and as markets turn favourable, you may receive fewer units. In the long run, this method acts as a shock-absorber for your investment portfolio.

  • Benefits of Compounding

    SIP investments use the power of compounding to invest over time and through various cycles of market volatility. SIPs are appealing because of the compounding returns over time. When you make a monthly or quarterly SIP payment, your earnings are reinvested at pre-determined intervals. This activates the compounding effect, which helps you create a larger corpus in the long run.

    For example, if you invest a small SIP amount of Rs 2,000 per month in a scheme, it can build up a sizeable corpus after a few years' time. This is known as the compounding effect. In case you receive a generous annual return of 10%, then you will amass Rs 15 lakhs in 20 years.

    Note: The above figures are used only for illustration purposes.

    [Calculate the future value of your SIP investments with the help of a SIP Calculator]

  • Hassle-free Investments in Mutual Funds

    With compounding and averaging on its side, an SIP makes a great investment option for beginners without much knowledge on market conditions.

    SIPs are hassle-free; they require little to no effort to set up. By investing a fixed amount each month, investors learn the patience and discipline of time-bound investments. SIPs are linked to one's bank account, so they don't need to start investing manually. By virtue of being automatic, SIPs are set up to make for convenient long-term investments that go through repetitive cycles of volatility.

    You can decide to invest an amount as low as Rs 500 in an SIP and simply begin your investment journey. SIPs are accessible to everyone; they do not require extensive market knowledge; a simple comprehension of mutual funds and the SIP process is sufficient. A Demat Account is not required for SIP investments in mutual funds. As a result, SIP is an extremely convenient investment option. Mutual fund investors can sit back and relax as their SIP investments could weather the current market conditions.

    For new investors, the comparatively safer way to invest in an equity mutual fund is through an SIP. It is simple to open an SIP account and begin investing regularly due to the presence of online investment platforms.

    Digitally-savvy individuals are increasingly investing in equity mutual funds through the Systematic Investment Plan (SIP) route because of the simplicity of investing, the benefits of disciplined investing without having to worry about market volatility, and the capacity to compound money over time.

To conclude…

When markets turn volatile, many investors begin to question their investment decisions and consider discontinuing their SIPs or withdrawing their funds. It is natural to panic in a volatile market when you see your investments in red. However, it is prudent to continue your SIPs, particularly in a falling market, because the same amount of monthly contributions will result in the purchase of additional units.

Investors will have to temper their return expectations in the current market scenario and opt for a combination of active and passive fund allocation. Existing SIP investors shall stay put into gaining significant returns when the market is correcting or witnessing wide fluctuations.

Now that you understand how SIPs can help you weather market storms, you must ensure that you choose worthy SIP investments based on your risk profile, investment horizon, and financial goals, and embark on a journey of wealth creation. As a result, make sure that your SIP investments are in a worthy mutual fund scheme.

This article first appeared on PersonalFN here

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