Russia’s displeasure with Ukraine’s attempts to join NATO and further its decision to launch a full-scale attack on Ukraine by invading its territories in February 2022 has impacted the world.
All nations are anxiously watching the dynamics between these two nations as it has implications for trade, fund flows and global economic growth and political stability.
The ongoing conflict has affected the financial markets globally. Nearer home, after rising up in December, the Indian markets have entered a correction phase once again. The deeply brewed volatility is keeping investors on tenterhooks.
During such times of volatility, if you choose to trade for quick money, you could lose everything. Instead, choose long-term, gradual and periodical investments to grow wealth, using systematic investment plans (SIPs).
This mode of mutual fund investing allows you to invest systematically and in a gradual manner. It can help you tide over the uncertainty and make the most of volatility in equity markets.
Historically, it is seen the annual Nifty50 TRI has generated positive returns nine times over the past eleven years. So, current market volatility is a small aberration for long-term wealth creation. As over the longer term, market volatility subsides and the returns are within a narrow range.
For example, consider the performance of a large cap fund (HDFC Top 100 Fund) vis-a-vis the Nifty50 from March 2020 (Covid crisis) to March 2022, the fund underperformed the Nifty50 TRI but gave positive returns.
If an investor had invested ₹10,000 in HDFC Top 100 Fund in March 2019, when the market crashed in March 2020 the amount would stand reduced to ₹6,244.
However, when the market bounced back in March 2021, the value would have increased to ₹12,385. Further, when the market tapered in May 2021, the value would decline to ₹11,217.
From December 2021 onwards, when the markets started rallying, the value would have increased beyond ₹14,000. However, now because of the Russia-Ukraine conflict, the market is volatile and there are indications of a sharp correction ahead.
When you invest in equity mutual funds you don’t have to worry about the stock selection process. Instead, you can simply focus on your goal and continue investing systematically, without giving in to the market turbulence-related panic.
When you do a SIP regularly, you get an opportunity to buy units of funds holding a basket of multiple stocks, irrespective of the prevailing market situation.
The biggest advantage of doing an SIP is the principle of rupee cost averaging. When the markets fall, more units are bought and when the markets rise, fewer units are bought. And over the years, the power of compounding helps in accumulating wealth.
For example, let’s assume you are investing ₹10,000 monthly in a SIP and the Sensex drops by 5 percent every month for the next six months and then it rises 5 percent every month for the remaining 6 months. At the end of the year, the amount you receive is ₹1,45,971 on investment of ₹1.20 lakh even though you saw a rise of 30 percent and then a drop of 30 percent in the markets.
If you observe, you started with an NAV of ₹10 and at the end, it was again back to around ₹10 after a year. The Sensex is just a reference point to show market movements.
So, SIP investing in an equity mutual fund, irrespective of market movements, is an extremely helpful tool in the hands of the investor.
Market volatility is to be expected, but staying invested for the long term is the most critical part of an investment journey. More wealth could be lost waiting for a market correction, than during it.
It is very difficult to time the markets. And even seasoned investors have warned against the very notion of timing the markets.
So, one should always stay invested and the best way to benefit from the ups and downs of the market is to invest via systematic investment plans or SIPs.
By investing through SIPs, one is assured of participating in the stock market action no matter what the direction of the market is.
SIP as a mode of investing is gaining traction and investors are realizing its importance. AMFI data endorses this fact as the number of SIP investor accounts have increased from 4.03 crore in December 2014 to 11.43 crore in February 2022.
To Sum Up
Investing in times of turbulence can be a tough task, but if you want to grow wealth, you must be patient and invest diligently and regularly, irrespective of volatility and whether the market corrects or reaches new highs.
Don’t give in to your emotions at any point in time before you achieve your financial goals and keep investing via the SIP route. The SIP mode of investing will keep you focused, compound your wealth and relieve you from active market tracking as you invest in professionally managed mutual funds that hold many good companies.
The author is Director, Ventura Securities
Disclaimer: The views and recommendations made above are those of the analyst and not of MintGenie.
