How SIP Investments help you benefit from volatile markets
Slow and steady investments through SIP help to accomplish financial goals.
We have all heard the tortoise-hare story of how slow and steady wins the race during our childhood. When you apply the same slow, and steady investments approach, you can accomplish your financial goals through a systematic investment plan (SIP). This article will explain the concept of SIP, how it works, and its benefits. We will also understand how SIP Investments help you benefit from volatile markets with the Dollar-cost averaging concept.
What is SIP Investments?
A systematic investment plan (SIP) is an investment method in which an investor invests a fixed amount with regular frequency (usually every month) in a specified mutual fund scheme. The amount gets debited from the investor’s bank account on a specified date every month through an auto-debit mandate. The deducted amount gets invested in the selected mutual fund scheme, and the investor receives the equivalent number of units based on the net asset value (NAV). SIPs are one of the best ways for individuals to invest towards their financial goals and achieve them.
Rupee-cost averaging & SIP Investments
One of the benefits of SIP is Dollar-cost averaging. The Dollar-cost averaging strategy is used to even out volatility, which is the inherent nature of the market. The Dollar-cost averaging concept started in the US. In India, it is also known as Rupee cost averaging. We constantly keep averaging our purchase price of mutual fund units during market upswings and downswings with the combination of staggered investments through SIP and dollar-cost averaging. Let us understand this with the help of an example.
Suppose you have started a monthly SIP of Rs. 1,000 in a mutual fund scheme. Let us assume this is how your investments will happen for the 1st year.
|Month||SIP Amount (Rs.)||Total amount invested||Scheme NAV (Rs.)||Number of scheme units for the month||Aggregate number of scheme units||Total value of the portfolio (Rs.)|
How SIP averages your purchase cost: As can be seen from the above table, you made a total investment of Rs. 12,000 over the year, in the form of monthly SIP instalments of Rs. 1,000 each. At the end of the year, you have 1353.45 units. So, your average cost per unit is Rs. 8.87 (Rs. 12,000 total investment / 1353.45 units).
The total value of your portfolio at the end of the year is Rs. 13,534.45. So, on an annual investment of Rs. 12,000, you have made a return of 12.79% for the year.
Lumpsum versus SIP: Imagine if you would have made a lumpsum investment of Rs. 12,000 at the start of the year. At a NAV of Rs. 10 per unit, you would have got 1,200 units, and the total value of your portfolio at the start of the year would have been Rs. 12,000.
At the end of the year, the NAV is still at Rs. 10 per unit. So, at the end of the year, with 1,200 units and a net asset value (NAV) of Rs. 10 per unit, the value of your portfolio will still be at Rs. 12,000, the same amount with which you started. So, in this case, the returns with a lumpsum investment are nil, whereas the returns with SIP investment are 12.79%.
Benefits of SIP Investments
One of the most significant benefits of SIP is that it averages your purchase cost. When the market is going up, you get fewer units, but the value of your existing units goes up. When the market is going down, you get more units, and your average cost of acquisition goes down. When the market is going down, you keep accumulating more units, and when the next bull market comes, you benefit from the value of your overall portfolio going up. Thus, dollar cost averaging helps to tackle market volatility.
Removes the element of market timing:
Every investor will prefer to buy at the lowest price and sell at the highest price. But, this is easier said than done. Even the best of experts are not able to time the market. With a regular SIP, you can remove the element of market timing and invest every month irrespective of the market levels.
You need to give an auto-debit mandate for your systematic investment plan (SIP) only once. On completing the one-time setup process, your bank account automatically debits every month with the specified amount. You can focus on your work, and the SIP takes care of itself. Thus, a SIP provides convenience to the investor.
Inculcates investing discipline:
A SIP helps you inculcate the discipline of investing regularly, which is the key to achieving your financial goals. By investing a small amount periodically and giving time for your investments to grow, the possibility of achieving financial goals is high. When you invest manually, you will have reasons to procrastinate and not invest. But, with the SIP auto-debit feature, you will become a disciplined investor.
Power of compounding:
To benefit from the power of compounding, you need four elements: regular investments, reinvestment of profits, time, and expected rate of return. You should start your SIP in the early part of your career. If you do that, you will be able to invest regularly for an extended period.
When you choose the growth option, then from time to time, the profits booked by the AMC will be reinvested on your behalf, and additional units of equivalent value will be allotted to you. Historically, Indian markets have given good returns in the past, despite cycles of boom and bust. So, if you start your SIP early, opt for a growth plan, give it time, you will earn good returns by benefitting from the power of compounding.
The minimum SIP investment amount for most mutual fund schemes starts from as low as Rs. 500/month. This is very affordable and can be managed by most people across income groups. Thus, SIPs are very pocket friendly.
Gives fractional ownership of stocks:
With a mutual fund SIP, you get fractional ownership of a wide variety of stocks as an investor. For example, if a mutual fund scheme has a 30-50 stocks portfolio, with a monthly SIP of just Rs. 500, you get fractional ownership of all those 30-50 stocks. Thus, you can participate in the growth story of all companies that are a part of the scheme portfolio.
A SIP offers a lot of flexibility. You can start and stop a SIP at any time. You can stop investing fresh money but continue to hold the existing units. You can redeem units partially or fully at any time.
How to invest in SIP
The key takeaway with the combination of SIP investments and Dollar cost investing is: market volatility is taken care of, and there is no need to time the market. In the 21st century, technology has played a vital role in shaping up how we conduct our financial affairs. Today you can open up your phone and tap a few buttons to plan and invest in a SIP towards your financial goals with Glide Invest. You will get guidance for:
- A personalised risk profile assessment
- Identifying your financial goals
- Appropriate asset allocation
- Making a financial plan for each goal
- Automating the financial plan
- Review and analysis of your financial plan
- Hand holding you till your financial goals are achieved