We are staring at a 0% return by Sensex in the last 12 months. Indian equity markets are set to post their worst half-yearly performance in the past two years as the market sentiment has turned negative on account of an elongated geopolitical conflict between Russia and Ukraine and the consequent rise in key commodity prices and also impending recession gripping the US markets. That apart, central banks’ action to tame galloping inflation by raising key rates also punctured the equity market rally in the last few months.
So in such a volatile market scenario even the most diligent investor may experience anxiety when markets become extremely unpredictable. Also, if volatility persists for an extended period, like it has been the case for the last few months; many of you may not enter the markets or withdraw your investments completely which is not the ideal strategy to build wealth.
I believe building wealth is not a rocket science process. With dedication and discipline, you can de-risk your portfolio & grow your wealth. This is where Systematic Investment Plan (SIP) plays a crucial role in earning better returns over a period. It is a well thought out and planned way of investing which helps to nurture the habit of savings and fulfil your goal of wealth generation.
In case of SIP, one can invest on a weekly, monthly or a quarterly basis as per his or her convenience. A fixed amount is deducted from the bank account of the portfolio holder and is invested in mutual funds. The number of units is allocated at the current market price which is equal to the amount invested divided by the NAV.
SIPs will help you earn optimum returns only if you stay invested for at least one complete market cycle. Continuing with SIPs during the market correction will allow you to buy more units at a lower NAV and average the total investment cost. Equity is a volatile asset class and during this market correction SIP gives an opportunity to buy equities at a lower price and reach the financial goals sooner.
One of the most common mistakes people commit during market correction is over averaging the cost in individual stock by buying a stock at every dip on the belief that the average cost of acquisition would be lower, and once the stock recovers that would enhance their return. No one can time the market perfectly, thus SIP's plays a vital role in investing. So while the market is getting corrected SIP will work better as it will lead to cost averaging.
We know no one has huge amounts of liquidity to invest at fixed intervals. Putting away fixed amounts every month or quarter works well for all investors big or small. The convenience and hassle-free benefits of the money getting deducted automatically from your bank account are unmatched. By avoiding the need for human intervention, you avoid the emotions of fear and uncertainty taking over. Neither do you have the stress of keeping tabs on the market. Opting for SIPs is more realistic even from a logistical standpoint.
Volatility is the very nature of the equity market; it is important to note that the market may not always be quick to bounce back after a correction. Therefore, the best way to sail through market volatility is to invest in a SIP. If the market volatility continues or if the market corrects further from the present level, the rupee-cost averaging benefits from SIPs would take care of the intermittent volatility, more units will be added on during the corrective phase of the equity markets, and when it begins to ascend again, this strategy will help you compound your wealth.
Mr. Vivek Goel, Co-founder and Joint Managing Director, Tailwind Financial Services, a new edge wealth management platform.