Maximize Your SIP Returns In Volatile Markets

As written on: 2^nd Feb 2021

Today, investors have plenty of investment schemes to choose from. In order to make sure that they do not end up investing in a scheme which is beyond their risk appetite, investors are expected to first get their hands on financial planning. The key to successful investment planning is first discussing your financial goals and prioritizing them according to their importance in your life. Goal based investing is known to generally work because it might motivate the investor to continue investing till their investment objective is achieved. Whether an investor will choose a conservative investment scheme, or a market linked scheme may depend on their appetite for risk. For example, conservative schemes are generally preferred by investors who carry low risk appetite. That’s because conservative schemes offer low fixed interest rates and hence do not carry high volatility. However, the interest rate on offer might not be enough to help an investor achieve their life’s long term financial goals. On the other hand, investors with a moderately high risk appetite with a long term investment horizon keen on generating capital appreciation by investing in market linked schemes can consider investing in mutual funds.

Mutual funds schemes are a pool of professionally managed funds which invest across the spectrum thus building a portfolio of diversified securities. Mutual fund houses hire fund managers who are responsible for buying and selling in quantum with the scheme’s investment objective. AMCs owning mutual funds collect money from investors sharing a common investment objective and invest these pool of funds across various asset classes and money market instruments. Depending on the nature of the scheme and its investment objective, a mutual fund may invest in securities and asset classes like equity, debt, gold, real estate, corporate bonds, government securities, treasury bills, company fixed deposits, etc. The performance of a mutual fund scheme may depend on the performance of its underlying assets and how these assets perform in their own sectors and economies.

What is Systematic Investment Plan?

Systematic Investment Plan is an easy and hassle free way to invest in mutual funds. Thanks to the introduction of an easy and hassle free method like SIP, investors from all walks of life can now invest and seek capital appreciation from mutual funds. Earlier, mutual fund investors only had the option of making a one time lump sum investment. This is a traditional way of investing in mutual funds. When you make a lump sum investment in mutual funds, you end up exposing your entire investment amount to market volatility. This is why most mutual fund investors who choose lump sum investment plan on entering when the market is low. This allows them to get more mutual fund units in their portfolio. These units are allotted in quantum with the investment amount and depending on the fund’s existing NAV (net asset value).

Maximize capital appreciation by investing in mutual funds via SIP in volatile markets

There are several reasons that make SIP a far better mode of investment choice as compared to lump sum investment which make them ideal way to navigate through volatile markets. The primary advantage of SIP investments is that investors get to choose an investment amount that they are comfortable with and invest that amount at regular intervals in a systematic and disciplinary manner. All an investor has to do is complete a one time mandate with their bank following which every month on a fixed date a predetermined amount is auto debited from the investor’s savings account and electronically transferred to the fund. SIP investors tend to also benefit from rupee cost averaging, a tool that might help them in the long run even in volatile markets. When the NAV of the fund is low, more units are allotted. Similarly, when the markets are performing, and the NAV is high, lesser units are allotted. This adjustment of allotment of units depending on the NAV is referred to as rupee cost averaging. Investors do not have to worry about volatile markets as long term investment via SIP is known to not only help them beat inflation but also help them accumulate wealth. The key to maximizing returns in volatile markets is continuing investing without worrying of the exiting market conditions. For example, equity schemes might be volatile when it comes to short term investments, but they are known to generate decent capital over the long term. Investors who continue investing without worrying about volatile markets even stand a chance of benefiting from compounding. In mutual funds, compounding refers to the interest earned on the interest earned from the principal investment amount. The small SIP amounts which continue to accrue interest may snowball into a decent corpus over the long term and help investors in achieving their long term financial goals.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.