Equity markets are currently experiencing a negative, anti-risk mood in the market.
And SIPs are an effective way of investing in the stock markets, especially for people with a lower risk appetite. The amount you invest every month remains constant, eliminating the worry of having a significant amount in your account when volatile markets are.
Most people are asking what they should do when markets are volatile. Should they delay their SIP and wait for the market to stabilize? Should they stop their SIP altogether? The short answer is no. You should not delay or stop your SIP.
Here's why:
SIP does not require you to time the market
It can be tempting to stop a Systematic Investment Plan (SIP) when the markets are down. But you don't have to time the market with SIPs! All you need to know is that your SIP will work out in the long run, no matter what ups and downs may happen in the interim.
Temporary downturns like the current scenario shouldn't put a damper on your investment plans. If your investments are spread out over time and across different types of investments, it's less likely that one bad year will throw off your whole strategy. In fact, this sort of volatility is why investing regularly with SIPs is so important.
You can use volatility to your advantage
As a SIP investor, it is essential to remember that market volatility isn't necessarily bad.
In a bull market or when the markets are going up, investors are buying high and selling even higher, but in a bear market or otherwise volatile one, it's easy to panic and liquidate your portfolio when prices start going down—which is exactly what you shouldn't do.
If you are investing for the long term, you don't have to worry about the ups and downs of the market. Investors who keep their composure are actually able to use volatility to their advantage. When markets are volatile, and prices are dropping, investors with long-term goals have time to load up on mutual fund units as they get more units with the same SIP amount.
Invest with a clear head
Investing is a long game. It's not about today's market prices. It's about the value of your portfolio in five or ten years. To keep you focused on the big picture, you need to have a goal for your investment strategy and stick to that goal throughout the ups and downs of the market, no matter how tempting it may be to check the performance of your investments every day.
Investing with a goal in mind is always a smart thing to do, but it's essential during volatile market conditions.
The most critical part of investing is not how much money you make when markets are up. It's how much money you keep when markets are down. When things go wrong in the financial markets, maintain perspective by focusing on your original goals and objectives.
A well-defined goal helps you set a course of action and stick with it even when it seems like everything is going wrong. For example, if you've invested with the goal of retirement income, your focus needs to be on consistent growth and not on quick profits.
If you're approaching your investment decisions from a place of knowledge and reason, you'll be better equipped to navigate the ups and downs of the market.
Let us give an example of three friends X, Y and Z, who started investing in an equity mutual fund through SIP. All three friends invested Rs.10,000 per month in ICICI Prudential BlueChip for their retirement in January 2015. For the sake of simplicity, we are ignoring inflation and a regular increase in SIP investment.
And then, in 2020, the pandemic created havoc in the equity markets. X continued with the investment, but Y stopped their investment in April 2020, so the last SIP instalment was in April 2020.
However, Z went into panic mode, stopped the SIP, and redeemed the entire investment.
The table shows their investment details
| Fund's Name | ICICI Pru BlueChip Gr Direct | ||
| XIRR (%) as on 06-07-2022 | 12.71 | ||
| X | Y | Z | |
| SIP | 10,000 | 10,000 | 10,000 |
| Investment start date | 01-01-2015 | 01-01-2015 | 01-01-2015 |
| Last SIP date | 01-07-2022 | 01-04-2020 | 01-04-2020 |
| Invested amount | 9,10,000 | 640000 | 6,40,000 |
SIP value as on 01-04-2020 | NA | NA | 5,76,034 |
SIP value as on 06-07-2022 | 14,87,013 | 11,68,365 | NA |
| Gain/Loss | 5,77,013 | 5,28,365 | -63,966 |
Source: AdvisorKhoj
The fund is selected for illustration only. It is not a fund recommendation.
So, we can see that Z redeemed at a loss. But, if she had stayed invested and continued with the SIP, she would have gained and be very well towards building a retirement kitty.
Hence, staying invested and continuing with SIP investment is important to achieve your long-term financial goals.
Conclusion
Mutual funds are a means to an end, not an end in themselves. This is especially true when it comes to long-term investing. If you understand that and have invested accordingly, you can ride out the market volatility like a pro.
Padmaja Choudhury is a freelance financial content writer. With around six years of total experience, mutual funds and personal finance are her focus areas.
