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SIPs and mutual fund investing go hand-in-hand in the minds of Indian investors. But many investors (especially beginners) wonder if they should continue with SIP investments in mutual funds when markets start going south.
The answer is yes! SIPs are, in fact, one of the tools you can use to help tackle market volatility. By averaging out investment costs over time, SIPs may help smooth out the impact of short-term fluctuations on your portfolio.
If you’re still on the fence, this article will explain how continuing your SIPs during market volatility can be beneficial for mutual fund investors.
Table of Content
Understanding Systematic Investment Plans and Market Volatility
A Systematic Investment Plan or SIP is a staggered way of investing in mutual funds. An SIP allows you to make fixed and regular contributions to a mutual fund scheme on a monthly, annually, quarterly, or weekly basis. For starting an SIP, most mutual fund schemes require a low minimum investment of about Rs. 500.
Market volatility, on the other hand, refers to periods of rapid and unpredictable price fluctuations in the stock market. Such price fluctuations may be caused by various reasons, such as geopolitical conflicts, global events, and economic policy changes.
When prices of underlying stocks and assets fluctuate, the NAV of mutual fund schemes can also swing significantly. This can impact the overall portfolio value of mutual fund investors, challenging their patience and risk tolerance.
What Do Mutual Fund Investors Do During Market Volatility?
When markets experience intense periods of volatility, most mutual fund investors tend to panic. They often take panicked decisions like:
Pausing SIP investments in mutual funds to avoid further losses
Waiting for market stability to return
Withdrawing their mutual fund corpus
While not all mutual fund investors behave this way, it is still a common course of action, particularly among beginners who have just started SIPs.
Risks of Stopping SIPs in Volatile Markets
As mentioned earlier, when markets turn volatile, many mutual fund investors start second-guessing their investment decisions and even consider withdrawing/stopping their SIP investments. But doing so leads to the following risks:
There is a possibility of missing out on the potential gains that may arise when the markets recover
You may lose out on the opportunity to buy more units of the scheme that you’ve invested in at lower prices (NAVs)
Stopping SIPs in mutual funds can disrupt your long-term financial goals, making it harder to build wealth over time.
Potential Benefits of SIPs During Market Volatility
Here’s a list of potential benefits mutual fund investors can enjoy if they stay put with SIP investing in mutual funds even during volatile phases:
1. Buy More Units Through Rupee Cost Averaging
Rupee cost averaging is a key feature of SIP. Through rupee cost averaging, you buy more units when prices (NAV) fall and fewer units when prices (NAV) rise. So, in a falling market, the same amount of SIP investment in mutual funds will now help you buy more units.
Over time, rupee cost averaging helps average out the cost of investment and the impact of short-term volatility on your investment portfolio. Accumulating more units at a lower NAV may mean better positioning of your portfolio later when markets recover and NAVs rise.
2. No Need to Time the Market
Mutual fund investors should also consider continuing with their SIPs because there’s no way to accurately time the market. In a falling market, it's almost impossible to time a lump-sum investment because the market may fall further after you invest.
With SIPs, you continue investing a fixed sum regularly, regardless of market conditions. Over time, SIPs may help you capture both the highs and lows of the market phases through rupee cost averaging.
3. No Compounding Breaks
Potential Wealth creation through SIPs and mutual funds works on the principle of compounding returns. Compounding is simply when returns on your investments earn their own returns. Now, compounding works ideally better when the given time frame is longer.
If you pause SIPs, those missed contributions don’t get added to your corpus and fail to earn compounding returns. By continuing your SIPs through market volatility without breaks, you ensure that compounding continues as well, without any disruptions.
4. Aim to Build Wealth for Long-Term Goals
Market volatility is typically short-lived, but your SIPs isn’t. Most mutual fund investors use SIP calculators and other tools to link their SIPs to specific goals like children’s higher education, buying a home, and retirement.
These are all long-term goals that may be years away, and stopping SIPs in fear of short-term losses can compromise your wealth-building potential for them.
Moreover, SIP investing in mutual funds may actually offer potential opportunities to build wealth for long-term goals during periods of market volatility, when you buy more units for a lower NAV. This may help you capture market recovery and aim to better along with your long term goals.
Tips to Manage SIPs During Periods of Market Volatility
Here are a few tips that may help you better manage your SIPs during periods of market fluctuations:
Avoid checking your SIP portfolio’s value daily during volatile market phases. Looking at potential losses may increase the chances of a panic sell-off.
Keep contributing to your mutual fund allocations consistently. Don’t get swayed by peer pressure or market volatility news, especially if you are a long-term investor.
Stay focused on your goals. While volatility may impact your short-term returns, it doesn’t shift your investment timelines for specific goals.
Conclusion
It’s natural to feel worried when you see your portfolio turning red during periods of market volatility. But at these times, it’s equally important to stay focused and avoid making emotionally driven decisions.
For mutual fund investors, continuing their SIPs during such times may be beneficial in the following ways:
No compounding gaps
Buy more units when prices (NAV) fall
Stay focused on SIP-linked goals
In short, it’s important to remember that SIPs offer a way to handle market volatility tactically through rupee cost averaging and aiming to seize potential opportunities for long-term growth. Remember that market volatility usually lasts for a few weeks to months, and you shouldn’t change your long-term plans for such short-term ups and downs.
Disclaimer
An Investor Education and Awareness Initiative by Tata Mutual Fund.
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This communication is a part of the investor education and awareness initiative of Tata Mutual Fund.
Disclaimer
*Mutual Fund Investments are subject to market risks, please read all scheme related documents carefully.
