SIP: One of the best tools to invest in volatile equities?

SIP: One of the best tools to invest in volatile equities?

Much like the tides in the sea, the bourses can be pretty unpredictable as well. Just like the tide that rises one day and withdraws another, similarly, the stock market fluctuates every day, going up and down. At certain times the volatility can be much high, leading to despair and disappointment. In periods of high volatility timing is critical. A sudden rise in prices can escalate the value of your investment, at this point, traders sell their investments at the high value that they will receive. On the other hand, a sudden drop or a crash can leave your investment value in tatters. The market has been turbulent, ever since the crash on August 24, 2015, which was the largest drop (1,624.51 points) the S&P BSE SENSEX has ever witnessed. 

In such times investing can be a big gamble even for experienced traders. But this does not mean one should stop investing at all, and wait till things settle down. On the contrary, investors should opt for Systematic Investment Plans (SIP) and harness the power it possesses. SIPs are similar to a recurring deposit account in banks, except the money is invested in a mutual fund and not a bank deposit.  Typically, this sum collected by MFs is invested in the debt/equities. But rather than being a loss-making proposition, SIPs can make positive gains even when the markets are unstable.

SIP includes the following benefits, which make it a suitable tool for investing in volatile equities.

Rupee Average Costing

In SIP, a fixed sum of money is invested periodically. Depending on whether the market is going up or down, the numbers of units that can be purchased vary, since the sum of money to be invested is fixed. Hence, when the market is going up, fewer units are bought at a high price and when the market is going down, more units are purchased at a low price. This induces a habit of investing, even when the market is low and other investors generally do the opposite and also in the long run SIP reduces the average cost of investments.  

Small but effective investments

In SIPs, you can invest small amounts over a long period of time instead of a lump sum amount in one go.  This way you can invest regularly and not face a financial block since the amounts are small. Also, volatility in the market will have small effects on small investments and not a big effect in the case of a one-time lump sum investment.

Power of Compounding
SIP is based on the principle of compounding. Regular investments calculated with compound interest earned on your investments could potentially increase your returns at a growing rate leading to a substantial amount at the end of a long term. 

Unaffected by timing

SIPs aim at long-term wealth creation. Since SIPs make you invest regularly regardless of market conditions that are prevailing, one develops investment discipline. Equities have the potential to outperform other instruments such as debt and gold in the long term. SIP in a mutual fund with the help of compounding and rupee average costing can stabilise the volatility to a certain extent and help you get the maximum benefit of long-term equity investment.

In the end, wise investors will understand the power of small and regular investments. Investment in equity funds through SIP can be a relatively less risky proposition, in comparison to direct investment in equities. Also, it has been shown time and again that sustained investments over a long-term help build a substantial corpus. Hence, SIP route to mutual funds can be a good strategy to adopt.

Happy Investing

Source:Moneycontrol.com