Protect Downside Through Systematic Investment Plan or SIP

When equity markets turn volatile, they cause a lot of anxiety, tensions and even sleepless nights. In the volatile times many investors abandon a carefully made investment plan in a knee jerk reaction and pay the price for it. Obviously, it is not a smart thing to do. The investors should realize that volatility exists in the market place and will remain so. After all, volatility is a statistical measure of the tendency of the markets to rise and fall. While volatility can be described as a natural phenomenon, there is a need for investors to develop ways to deal with it.

Mutual Funds, offering benefits such as diversification, professional management, and convenience, had emerged as an alternative route for small investors to invest in equity vis-à-vis taking a direct exposure. Systematic Investment Planning was one strategy, which was being actively encouraged by the mutual funds.

Broadly speaking, we need to try and understand

a. Is the market investment worthy?
b. If so, is this the right time to invest?

Is the market investment worthy?

We all know that in the long run stock markets are ultimately a reflection of the performance of the companies listed on the exchange. In short term there could be many factors such as liquidity, Govt. changes, monsoon, global factors, etc. which could make the markets volatile. But if the long-term fundamentals of the economy are intact, the markets will finally achieve the levels, which are line with the economic growth.

As things stand today, the fundamentals of Indian economy still remain strong. India is still predominantly a closed economy, with its’ own demand dynamics. The young demographic profile looks promising. A lot of fresh investment is happening in all the three sectors of economy viz. agriculture, services & manufacturing, not to mention infrastructure. There is as yet nothing to suggest that the GDP growth of 6.5-8% will not be consistently achieved over the next 2-3 years.

Of course, there are concerns on the oil prices, the interest rates, infrastructure bottlenecks, strength of the dollar, performance of global economies etc., which could affect growth in India too.

But looking at the pros and the cons, the balance still seems to be in the favour of decent and consistent growth.

Is it the right time to invest?

Generally investors’ will buy when the markets are rising and sell when the markets are falling but they should do the contrary. The important lesson we need to learn from the long history of the stock market is that ‘No one can time the market’. It is TIME spent in the market, which is important than the TIMING.

And the purpose of SIP is precisely that

It does away with our fruitlessly trying to predict the tops and the bottoms. And it removes emotions from our buying decisions. We buy more units when the markets are down and fewer units when the markets are high. So, we un-emotionally go on investing. And that is the secret of success of a long-term investor at the stock markets. The markets will be volatile. That is the inherent nature of the market. Consistent, long term investing in equity has delivered superior returns. SIPs iron out the volatility risk, associated with one-time investing.

In fact, the true benefit of SIP will follow by investing when the markets are down. We will now get more units. Our average cost of acquisition will go down and as markets recover, our recovery would also be faster. Though, of course, SIPs will not deliver profits if the long-term economic performance looks shaky and markets are consistently going down.

Therefore, the question whether SIPs make sense in falling market is inherently flawed. As long as one is confident of the economic growth going forward, SIP makes sense in any market – falling, rising or steady. Also, we need to be realistic about our expectations.

Source: NDTV