Mutual funds are meant for investors who want to stay invested for a long duration. Systematic investment plan (SIP) is an effective tool to make that investment on a regular basis. The SIPs have garnered the attention of millions of investors in the past few years because of the flexibility they offer. In August 2021, there were over 4.32 crore SIP accounts linked to Indian mutual funds, as per the AMFI data.
Any investor who can cough up a small sum of ₹500 a month can take part in the market rally.
However, what prevents some investors from making huge gains is the belief that they should stop their SIPs when the stocks are trading higher. They think that the SIP at the time of an overpriced market will fetch less returns in future. They hold these beliefs as a result of the old adage of ‘buying the dips and selling the rallies’.
The experts, meanwhile, strongly recommend being consistent in mutual fund investment. They say the equity investment bears fruits only when investments are made regularly year after year. And in the case of SIP, this implies regular investment over a long period of time.
Sandeep Bagla, CEO of TRUST Mutual Fund says, “Equity markets are meant for channelising long term savings into productive sectors. SIPs allow investors to spread their investments across volatile periods into equity oriented mutual funds to benefit from long term growth prospects. Investors should focus on extending their investment horizon and not stop investing in SIPs during volatile times”
Let us understand this with the help of an example:
You deposit only a sum of ₹500 every month as SIP in a mutual fund which is delivering a modest return of 10 percent per annum.
After only 48 months or four years, this investment will grow to ₹29,606, while you contributed ₹24,000, posting a gain of ₹5,606 which is almost one year of contribution. So, short term volatility will not impact your long-term returns.
This happens because of the power of compounding.
Let us understand this with the help of another example. If you allocate only ₹500 per month as SIP in a fund that is delivering an annual return of 10 percent consistently for 72 months, then after a period of six years, your total investment will rise to ₹49,465 while you invested only ₹36,000. This fetched you a total gain of ₹13,465.
So, while you invested an additional sum of 12,000 in two years, the additional return in just two years was ₹7,859, i.e. more than what you earned in four years.
Also, one must remember that the high prices of stocks this year can be lower than that of next year. When you are contemplating discontinuing your SIP because the prices are “high”, they can, in fact, be lower when you compare with the future prices.
Moreover, the doctrine of mutual funds is to outsource your investment concerns and decisions to the experts, so that you can spare yourself the hard part of decision making around the timing and time of investment.
So, we can summarise that market volatility is a short-term phenomenon, and should not impact your decision to postpone or cancel your regular dose of mutual fund investment.