SIPs best bet for investors during market volatility
The volatility could be used to the advantage by averaging the cost of acquisition of units. This improves the chances of better returns when the markets soar high
Nowadays, when we quiz others about how they would invest money invariably the answer comes as by doing a SIP. Upon further questioning, it dawns many potential investors that it's not an investment per se but a method of investing in equity markets through mutual funds (MF).
The new fad in the town is to SIP, though not many are aware of what and why and they are doing it. SIP is a Systematic Investment Plan and it's a regular way to invest in a MF.
There is always a temptation for us to time the market such that we could make greater returns by entering into the equity markets at the right time.
The anticipation of bottom of the equity markets is difficult and also to time to enter at that particular moment is fraught with danger.
Similar is the case to exit or book out of the equities at the top. To forecast and to execute such moves is not only difficult but also could turn futile in the longer run.
The risk to reward for such an expansive exercise is thin when compared to investing regularly in the market for a longer period of time.
There, thus goes an adage, "time in the market is important than timing the market." Certainly, it boosts our psyche to earn that extra by timing the market, but these gains pare down as the time spreads longer.
This is where SIP in a MF would greatly help the investor to attain the parity with almost negligible attention to the market.
The other glaring aspect that I've noticed in my interactions with most investors is the contribution towards the SIP.
Though, they understand the benefits of investing in equity MF through a SIP, they are either clueless or ignorant of how much should they be allocating.
Essentially to figure this, a reverse calculation is required i.e. one needs to first know why they are investing at the first place. Most begin their investments in SIP as one of their friends had suggested, a friend has forced or started due to an obligation to an acquaintance.
One has to primarily identify their goal i.e. the purpose of investing like that of a certain corpus to be generated within a particular period of time which could possibly a coincide a need. Sometimes it could just remain as a target to reach a certain amount within a timeframe.
Once, you have decided on that, the reverse calculation would easily give way to the quantum of the amount that could be put at a particular interval.
The other query that creeps up with most investors seasoned or rooky alike is the regularity at which the SIP has to be done. While the most popular one remains to be monthly, there are options of weekly and daily also available.
Again here, the frequency or interval of the SIP would be largely dependent upon the timeline of investing goal. The shorter the goal, the higher the frequency as need could mark the market.
Sometimes, the shorter frequency of daily/weekly could be used as a tactical measure though it may not prove advantageous in the long run.
Another frequently asked question is on the continuation of a SIP during market falls or even during periods of overall underperformance.
In volatile times like this, SIPs are at their best play for investors. The volatility could be used to the advantage by averaging the cost of the acquisition of units. This improves the chances of better returns when the markets soar high.
Some investors also divide the SIP(s) based on various needs. For instance, they mark out a fund or funds to a specific need and another one or set of funds to another need.
There's nothing wrong it technically and possibly also gives comfort of mental math for the investor on where the cashflows arrive from for each of the need.
Though, dynamically, an investor could just allocate across the funds for all the needs combined and time the withdrawals linking to the need with the desired amounts.
Of course, while planning for one or more goals it's important for the investor to prepare a portfolio of the MF so that there's a proper asset allocation.
This is critical as markets behave erratically and not all types of funds benefit in every market cycles. To gain better risk to reward, it's ideal to create a portfolio of MF.
(The author is a co-founder of "Wealocity", a wealth management firm and could be reached at firstname.lastname@example.org)