Moreover, investors also believe that the same strategy applies to systematic investment plans (SIPs). Therefore, the elusive goal here remains to consistently predict the top or bottom of the market precisely, making this endeavour challenging for investors.
The SIPs, however, are all about disciplined investing, where an investor chooses an amount, frequency, or time period and consistently invests in their choice of mutual funds. Therefore, engaging in SIPs eliminates the requirement of timing the markets accurately. Let us delve deeper into this aspect.
SIPs and timing the market
The beauty of SIP lies in its ability to allow an investor to not “time” the market. An investor can achieve several benefits from this systematic investment in the long term, regardless of the short-term fluctuations. In fact, SIPs work best in the volatile market due to benefits such as rupee cost averaging, compounding, and hassle-free investments.
Rupee cost averaging
The term rupee cost averaging means that with an unchanging amount of investment on a regular basis, one can average the cost of their purchase. SIPs usually allocate a fixed amount to a scheme, and the investor receives units against the net asset value (NAV). When the markets are high, one buys fewer units of the mutual funds via SIP. On the other hand, when the markets are down, an investor purchases more units for the same amount. Therefore, this enables one to average their costs during market volatility, and the overall cost of acquisition is reduced.
Compounding
SIPs tend to be highly beneficial when they are carried forward over a long period of time. This is due to the fact that the SIP investments also harness the power of compounding. Even a small amount of the investments can amass a sizable corpus after a few years of time.
Moreover, in a bid to get better returns, an individual can also opt for step-up SIP. It allows an investor to increase their investment amount annually. The increment can vary between 5 and 10%.
Hassle-free investments
Apart from the benefits that an investor can derive from rupee cost averaging and compounding, SIPs make great investment options for beginners who seek to enter the markets. SIPs are hassle-free investments, as setting them up is an easy process. Moreover, by investing in an SIP, an individual learns patience and discipline about time-bound investments.
Additionally, as the investments are directly linked to one’s bank account, they are not required to be initiated manually. By virtue of being automatic, SIPs can be set up to make for convenient long-term investments.
Make the most of your SIP
Start early: Ideally, one must start investing as soon as they start earning. This provides a mutual fund SIP with ample time to benefit from the power of compounding. With a longer time horizon, an investor increases the probability of earning higher returns.
Map SIPs to financial goals: One must always do conscious investing and map the SIP to an investment goal. When an SIP is mapped to a specific financial goal, the chances are less that a person will redeem it until that goal is reached, making them a disciplined investor.
Never skip an SIP: Many investors try to pre-empt the small market moves and try to adjust their plans accordingly. They either pause, redeem, or start their SIPs abruptly, which is likely to hamper the outcomes. Therefore, one must never try to time the market and their SIPs.
All things considered
Trying to time the market with SIP usually defeats the core purpose of systematic investments. SIPs have a dispassionate nature, which usually saves an investor from the trap of greed and fear. SIPs furthermore eliminate the guesswork and make an investor disciplined and consistent.
One can bear several benefits from these systematic investments, including rupee cost averaging, compounding, and hassle-free investments. Moreover, in a bid to procure the maximum benefits, one must start early, map SIPs to financial goals, and never skip an SIP due to small market adjustments.
Hemant Sood, Founder of Findoc
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Updated: 28 Nov 2023, 04:51 PM IST