The uncertain times can compel you to rethink your investment decisions. The recent pandemic has certainly slowed down the global economy. It was no less than a few months back that the entire world panicked over the market crashing. You (the investors) might have battled questions, such as ‘Should I pull out my mutual fund investment?’, ‘Is it time to call it quits?’, ‘Should I continue to invest in mutual funds?’
While the existing scenario seems scary, it is not the first time the market has responded to a crisis in the current manner. In fact, the historical events of the stock market have taught us is that it ultimately recovers despite the volatility. In fact, an SIP (Systematic Investment Plan) can make volatility work in your favour. Let’s understand why you should continue your SIPs irrespective of the situation:
- Benefits of compounding
Generally, the holding period varies between 3-5 years. While many investors withdraw from their SIPs due to risks involved, smart ones stay invested for a longer term. Long-term SIP investment is beneficial for many reasons. For starters, it lets you accumulate a huge sum of money over time. That is when the compounding benefits start to show up! Compounding allows you to build a sizeable corpus that further helps you achieve your future financial goals.
For instance, suppose you invest a minimal amount of Rs. 5,000 every month in SIP. If the rate of return is 8%, you can easily save a total amount of up to Rs. 30 Lakhs in the next 20 years. So, start your SIP investment with a small amount even when the market is down to ensure you accumulate a substantial corpus for a secure financial future.
- Rupee cost averaging
Let’s understand rupee cost averaging with the help of an illustration. Assume that you make a SIP investment of Rs. 5,000 every month for over a year in an index mutual fund. Under such a scenario, you will end up making the following investments by the end of the year:
| MONTH | NET ASSET VALUE (NAV) | NUMBER OF UNITS |
| January | 58 | 86.21 |
| February | 63 | 79.37 |
| March | 75 | 66.67 |
| April | 40 | 125.00 |
| May | 35 | 142.86 |
| June | 30 | 166.67 |
| July | 28 | 178.57 |
| August | 34 | 147.06 |
| September | 60 | 83.33 |
| October | 50 | 100.00 |
| November | 52 | 96.15 |
| December | 48 | 104.17 |
Now, if you invest Rs. 60,000 (Rs. 5000 each month), you are likely to receive over 1376.05 units by the end of the year. In case your SIP matures in December, the NAV will be Rs. 48 (based on the table above). So, the total value of an investment will be Rs. 66,050.23 with a profit of Rs. 6025.23.
But, if you invest a lump sum amount in January (at the beginning of the SIP), you will receive a total number of units 1034.48 (which is 341.56 units less than before). Based on it, the total value of your investment is Rs. 49,655.17 with a loss of Rs. 10,344.83 by the end of December.
As you can observe from the above example, even in a volatile market, a SIP investment averages out your purchase price as well as provides reasonable profits. In simple terms, you receive more units due to the benefits of rupee cost average, even when the market is down.
- Uncomplicated process
Let us all agree that investing is quite a tedious task, especially for first-time investors. However, the good news is that with SIP investing no longer has to be a daunting or a time-consuming process. In fact, SIP investments are hassle-free and convenient.
Investing in SIPs allows you to build a strong financial discipline. You don’t even have to worry about making your monthly payments manually. Since SIPs are linked directly to your bank account, the amount is deducted on the specified date of every month automatically. All you have to do is make sure that you have sufficient funds in your bank account for the automatic deduction, and the rest will be taken care of.
We understand that now might be a difficult time to invest. But remember, market volatility will always be a part of your investment journey. What matters the most is how well your investment strategy plays for you during these challenging times. Place your bet on a SIP investment despite the risks. Trust us, it is the best you can do for yourself. Happy investing!
