Owing to ongoing correction in the equity markets, most investors are generating negative returns from SIPs made during the last three years. This may lead many investors to ponder whether to continue with their SIPs in the current bearish scenario. Many investors considering fresh SIPs would probably be procrastinating their plans due to the ‘emotion of fear’.
However, one of the fundamental grounds of investing via SIP is to do away with the burden of market timing.
Here are 5 reasons to begin SIP in equity funds under the current market scenario:
Eliminates the requirement for market timing
As timing an investment requires sound knowledge of macroeconomic situations, technical and fundamental analysis, policy impacts, geopolitical trends, etc, tracking these for an average investor might be a difficult task.
Many investors are tempted to invest more during rising markets and under-invest during falling markets. Routing your investments via SIP not only ensures automatic and regular investment but also saves you from the dilemma of timing your investments depending on market volatility. It also averages out your investment cost by buying more units at the time of market correction.
Ensures regular and disciplined investment
SIP requires investors to invest a predetermined amount at a preset date from their savings bank accounts to their chosen MF schemes. This automatic deduction ensures regular investment and saves you from getting influenced by the twin emotions of fear and greed. Regular investment also assists in instilling financial discipline as the investors are compelled to restrict avoidable expenses to fulfill SIP commitments.
Activates rupee cost averaging
While the investment amount via SIP stays the same for each interval, the number of units purchased varies basis the market levels. More units are bought when the market prices are low and fewer units are bought when the prices are high.
This assists in automatically averaging your investment cost. For investments with long term horizons, investing via SIP allows you to exploit corrections for your benefit by purchasing more units at lower NAVs.
Requires smaller investment amount
Usually, fresh lumpsum investment in most equity funds can be started with Rs 5,000 while additional investments can be made at Rs 1,000. However, when routing your MF investment via SIP, the minimum investment amount can be as low as Rs 500 in the case of ELSS and Rs 1,000 in case of other mutual funds.
Thus, SIP enables you to begin your MF investments with a very small amount without waiting for the accumulation of a bigger sum for investment.
Benefit from the power of compounding
Compounding is a concept where the interest earned from your investment is reinvested along with your initial capital, which then begins generating returns by itself. This assists in generating additional earnings over time.
As SIP can be started with a small investment amount, you can begin investing very early in your life by investing a small amount each month and thereby, avail the benefit of compounding. For instance, a small amount of Rs 1,000 invested per month at an average annualized return of 12 percent for 30 years would build a corpus of about Rs 35 lakh.
What to do with equity mutual fund investments through SIP in the current market scenario?
Given the steep correction in equity markets, quality stocks are available at fairly attractive valuations. Hence, those beginning their fresh equity investments via SIPs should consider topping up their new SIPs along with their existing ones, if any, in a staggered manner.
Doing so would allow them to purchase more units at lower NAVs and reduce their average investment cost. This would help them to create a bigger corpus when the market recovers, thereby assisting them to reach your financial goals sooner.
However, when investing in equities via SIP, investors should avoid redeeming their emergency funds or entire short term surpluses as any financial emergencies during the bearish phase may compel them to sell off their equity funds at a loss or avail loans at a high rate of interest.