Several investors run from the mere thought of market volatility. To ensure that they are as far from these market fluctuations as possible, these investors end up investing in different types of investment that are relatively safer and thus, less prone to be affected by market fluctuations. However, these investors fail to understand the concept that market volatility is an important factor behind earning significant returns. No wonder equities cross the minds of investors when the term wealth creation is mentioned. But, is there a way to avoid market volatilities and still invest in equities? Well, there is. Through Systematic Investment Plan or SIP, an investor is able to enjoy the benefits of equity mutual funds without parking too much of their cash at a time.
What is SIP?
Unlike common misunderstandings, SIP is not a financial vehicle to invest in, rather it is an investment tool that helps to invest in mutual funds. SIP investments allow investors to divide their entire investment amount into small, insignificant sum of money which is invested in the desired mutual fund schemes at regular intervals for a given duration of time. The investment amount, frequency of the investments, investment duration, and other details are predetermined by the investor before investing in SIP mutual funds.
How does SIP work as an antidote?
It is almost impossible predict the market movements and determine the exact time when the markets are at its peak or when they are in a slump. As a result, it is difficult to pinpoint the right time to enter the markets and invest in mutual funds. A market slump may continue for years and a rally can go on and on for a few months or even years. This is when SIP mode of investing comes to rescue. SIPs aid investors to naturally get rid of the quandary of figuring the right time to enter the markets. What’s more, SIPs also help to tame an investor’s intrinsic biases that may prove to be detrimental to their investment outcome. For instance, several investors rush to pause or stop their SIP investments during the beginning of a market fall in a fear that they will lose their money. Similarly, several investors rush to begin their SIPs in a rising market as they don’t want to miss out on the bull market cycle. When you invest in SIP, you need not worry about the market cycles due to the concept of rupee cost averaging. As SIPs ensure regular investing over a period of time irrespective of the market conditions, one ends up investing in mutual funds via SIP across various market cycles – bear and bull market phases. As a result, an investor ends up purchasing higher number of mutual fund units when the markets are at its bottom than when the markets are at its peak. This helps to average out the total cost spent against buying mutual fund schemes. This concept is popularly known as rupee cost averaging. Remember, the strength of SIP investments lies in simplicity. Happy investing!