If the fear of volatility in stock markets is keeping you away systematic investment plans (SIPs) in mutual funds or equities may be your ideal way to profit.
What is an SIP?
An SIP allows you to invest a pre-decided amount in a set of stocks or mutual funds/exchange-traded funds at regular intervals and beat market volatility by averaging out the costs. Prabhudas Lilladher offers you all the SIP instruments via its offices across the country.
You can set up an SIP via your trading account or via a bank account , and buy a fixed number of shares/units for a defined number of periods. The shares / units are bought at the prevailing market rate at the time of SIP each period and keep adding to your account.
You can choose to invest at any frequency-daily, weekly, fortnightly or monthly in the stock or mutual fund of your choice.
How SIPs work
Equity SIPs eliminate the market timing-related guesswork as you are pre-committed to investing at regular intervals and therefore no matter what happens, you are never asked to decide! You are eliminating emotions from your investing activity. SIP makes the investments as planned without any further intervention from you. Thus you are spared of the decision-making agony every time you need to invest.
If you are preoccupied with market sentiment , you may often miss out the best days (An analysis shows that people who time the markets and miss just 20 best days during the year may lose half the annual return!).
By buying shares or units in stages over a period of time, the investment “averages out the price” and prevents a lumpy investment. This way, when markets turn volatile, you do not see the ups and downs so much as the person who invests lumpsum – as you benefit when the price moves down (Your Instalment amount divided by a lower price = Higher number of shares or units!) by lowering the costs as well!
Volatility is good!
Lets say you buy a share or mutual fund via SIP at Rs 10 and it goes down to as Rs 5. This gets you more units and then as the market normality returns, you are staring at a price of lets say Rs 25. At this stage, your average cost would be low low that almost at any price even below Rs 25 you would make a handsome profit. Investors often get scared with volatility and do exactly the opposite – A classic example is the period from 2008-2009 where, as per market data, 60 percent of SIP were stopped because the markets plummeted after the Lehman crash. If those SIPs had remained till 2010, when the markets recovered, the investors could have doubled the money!
However, it does seem that increased awareness has worked – in the last 4 months in 2018, SIP flows have increased by almost Rs 1500 crs per month and not decreased despite several challenges to markets. People are beginning to stay invested to meet their life goals and with good fund managers available, this is the right thing to do.
Our Recommendation
A lot of people come back asking which are the best funds to invest in for SIPs and often end up preferring the less volatile ones – while in fact, one should look at starting SIPs into more volatile ones. Or even in stocks for that matter. Therefore we recommend SIPs into classy Midcap or Multicap funds depending on one’s horizon and risk appetite.
Out of favour themes, like IT was last 3 years or Pharma, or PSU Banking could be a good way to start off SIPs as they are currently trading far below fundamental valuations and while it may take time for them to return to their glory days, it would be a good strategy to invest in these. One way to do this would be via sector based ETFs / Index funds apart from actively managed funds.