In a volatile market, why is it better to invest via SIPs?

Rahul forayed into the world of investing a few months ago. As per advice from his friends, he started with SIP investments. When the market hit a rough patch, Rahul was in a fix. Should he continue with his SIP investments or stop them right away? Rahul was also worried about the long-term capital gains tax levied on schemes held more than a year where gains are above INR 1 lakh. If you are also in the same boat, read on to find out why it would be wiser to invest via SIPs in mutual funds, even the times are not favourable.

Make SIPs your best friend. 

First, stopping a well-performing SIP investment before you have achieved your target is not wise. SIPs are an excellent option when it comes to volatile market conditions. It is always advisable to hold on to your investment for at least seven years before stopping it. Otherwise, you run the risk of capital erosion. If you hold on to your investment for a more extended period, the chances of receiving better returns are much higher. Volatile markets should be viewed as short-term aberrations. SIPs can be your best friend to tide over this time. All thanks to rupee cost averaging. This principle helps you to compound your hard-earned money and generate a handsome return. For example, Rahul and Rajeev want to save approximately INR 50 lakh each for their children’s higher education. They both have a 15-year investment horizon. Rahul starts a monthly SIP of INR 9,900, and the mutual fund scheme gives a return of 12% CAGR. This investment strategy can help him achieve his investment goal quickly. On the other hand, Rajeev opts for a fixed deposit at the rate of 8%. Rajeev will find it challenging to save up the required amount within this instrument’s time period.

Due to rupee cost averaging, you get a chance to buy more mutual fund units when the cost is low. When you invest in SIPs, you get more committed to investing a certain amount of money, irrespective of the market condition. This helps you to buy the mutual fund units at a better price. In other words, one can say that the average cost of the investment is lower, and the potential returns are much higher.

Equity mutual funds are a long-term game.

If you decide to discontinue SIPs due to unfavorable market conditions, you end up making investment decisions based on market behavior alone. However, investments should give due regard to the asset in which you are investing. Volatility could be a short-term occurrence, but you cannot plan your entire investment based on this alone. When the markets come back to normal conditions, you will end up making significant gains from SIP. So keep in mind that the purpose of your investment is making returns in the long run. The hiccups on the way will get resolved. 

Timing the market is dangerous to your financial health.

With SIPs, there can never be a right time to invest. SIPs ensure that you invest in the market, no matter what the condition is. You should ensure that you pick suitable mutual funds to invest in as mutual funds are also subject to risks. There is little sense in trying to assess the condition of the market. Instead, choose a financial advisory platform such as Moneyfront that can guide you with the right choice of mutual funds that perform consistently. With Moneyfront, you can invest in a direct plan that does not include any commissions or distributors’ fees. This results in potentially higher returns for you. You can also review the performance of your schemes periodically and make any changes if needed.