Summary:
Systematic Investment Plan (SIP) refers to the technique of investing in mutual funds. It enables people to invest a certain amount of money at fixed intervals, which is usually monthly. This blog explains how investors can navigate the ups and downs and get past fluctuations and volatilities.
Introduction to SIP
Systematic Investment Plan (SIP) refers to the technique of investing in mutual funds. It enables people to invest a certain amount of money at fixed intervals, which is usually monthly. Investors need to decide the frequency (such as monthly or quarterly) and the amount of money they want to invest. These are a convenient and popular method of making investments in mutual funds and have the following advantages:
- Regular investments: Through SIPs, investors can invest a certain amount of money at fixed intervals, typically monthly. One of the biggest advantages is that it promotes financial consistency and discipline, helping people save and invest over time.
- Rupee cost averaging: Through SIPs, investors are able to buy more units of mutual funds when the market is down (low unit prices) and fewer when the market is up (high unit prices). This technique is known as rupee cost averaging; it reduces the effect of market volatility on investments.
- Affordability: Investors find SIPs to be flexible because they can be initiated with a relatively small amount of money. This makes it accessible to a wide range of investors, especially those who have limited capital.
- Diversification: By using SIPs to invest in mutual funds, investors are able to gain exposure to a diversified portfolio of securities. This helps to spread risk and improve returns.
- Liquidity: SIPs are known for liquidity, implying that mutual fund units can be redeemed and/or sold at any time, if the fund's terms and conditions permit it. This provides investors with the flexibility to be able to access their investments if and when they need it.
- Variety of funds: Through SIPs, investors can access a variety of options. These include debt funds, equity funds and hybrid funds. Depending on their availability of capital and risk tolerance, investors opt for funds that match their financial goals.
- Long-term wealth creation: Long-term wealth creation is one of the biggest advantages of SIPS. The power of compounding helps investments grow significantly over time.
Risks during volatility:
Despite the benefits and advantages, SIPs too, like other forms of investments are exposed to market fluctuations and volatility. Even though the risks are less in comparison to other forms of investments, they are not foolproof. Events such as the COVID-19 lockdown and other macroeconomic shocks exhibited how even SIPs were impacted and caution needs to be exercised while parking investments. For investors, both old and new, the following are some of the steps that can be taken to mitigate risks and maximise returns:
- Diversification of portfolio: The key to managing risks is diversification. By spreading investments across different industries and asset classes such as debt and equity, and sometimes even allocation to international markets. The impact of market volatility and fluctuations can be reduced through this technique.
- Stay committed: The goal of SIPs is wealth creation in the long term. Regular investments, irrespective of the market conditions, should continue. A few swings and changes should not result in the complete withdrawal from the investment because things such as fluctuations usually even out, unless of course if they are massive events.
- Emergency fund: Investors ought to set aside an emergency fund to cover around three to six months of living expenses, which should be accessible in a liquid account. This helps to prevent dipping into investments in case there are emergencies.
- Risk tolerance: Investors should assess their risk tolerance. Market volatility causes steep fluctuations in the equity markets. For this, it is important to ensure that the investment choices reflect the risk tolerance of the portfolio. For example, a risk-averse investor would prefer to allocate more to debt funds and/or balanced funds.
- Rebalance of portfolio: From time to time, the portfolio should be reviewed and rebalanced, if needed. In volatile markets, the allocation of assets may deviate from the original plan. Through rebalancing, the desired risk-return profile can be maintained.
- Stay informed: Being aware of local and global market and economic conditions helps understand the factors that will affect returns and investments. Just because the market is volatile, it need not mean that your asset class or industry is going to be affected.
- Avoid emotional decisions: Most often, emotional responses result in poor investment decisions. One should avoid panic buying/selling during market swift movements because the results are not always desirable. Sticking to the original investment plan, with due changes because of volatility, is always the best approach.
- Long-term perspective: Despite volatilities, SIPs are preferable for the long term. These deviations are often just in the short run and markets recover and provide favorable returns over longer periods. Short-term fluctuations ought not to affect long-term goals.
Summing up:
Smart investing in SIPs entails the use of a systematic and clear approach that aligns with financial resources and goals, as well as risk tolerance. With a little help from financial professionals when needed, long-term wealth creation from SIPs should be a smooth process, even in situations of market volatility and fluctuations.