Why Doesn?t It Make Any Sense To Stop A Mutual Fund SIP Amid Crisis?

When making an investment, the important thing for any individual to keep in mind is that they need to remain committed to those investments. The problem with most individuals is that they start with an investment, but midway gives up on systematic investing. If you are irregular with your investments, wealth creation may seem like a distant dream. Those who are good with financial planning, for them regular investing is never an issue. That’s because the first step of financial planning is understanding your short term and long term goals. When you have a defined set of goals, planning your investments becomes a lot easier. You have a clear understanding of how much finances you need and how you need to spread them across multiple investment vehicles in order to balance the overall risk of your investment portfolio.

Every individual’s financial goals are bound to differ depending on their age, income, existing liabilities, etc. Hence, it is better that you do not replicate or mimic the financial goals of your peers, and rather focus on your financial needs. Once you have prioritized your financial goals, the next thing for an investor to do is to determine their risk appetite. A risk appetite is an individual’s ability to bear a certain amount of financial risk with the hope of fetching some capital appreciation at some point of time in future. Every investment scheme carries a different risk profile and to make sure that you do not invest beyond your boundaries, it is better to understand your risk appetite.

There are some investors who have zero appetite and these individuals generally consider investing in schemes that offer fixed interest rates. However, these interest rates on offer a low and may or may not help you get closer to your ultimate financial goal. However, there are some investors who are keen on pursuing market linked returns and want to give their investment portfolio a slightly aggressive approach. Such individuals may consider investing in mutual funds.

What is a mutual fund?

A mutual fund is a pool of professionally managed funds where the fund manager buys/sells securities in accordance with the scheme’s investment objective. Fund houses collect money from investors sharing a common investment objective and invest this pool of funds across the Indian economy. The money is invested in multiple asset classes like equity, debt, commercial papers, corporate bonds, government securities, treasury bills, etc.

Mutual fund investors are allotted shares in the form of units. Units are allotted in quantum with the investment amount and depending on the fund’s current NAV (net asset value). The performance of a mutual fund scheme depends on the performance of its underlying assets.

What is SIP?

The term SIP and mutual funds have become synonymous in today’s times. A lot of people confuse SIP to be mutual funds, but in reality, SIP is a method of investing in mutual funds. Systematic Investment Plan or SIP, is an easy and systematic way to invest in mutual funds. An individual can pay small amounts periodically (usually monthly) towards their mutual fund investments instead of making a lumpsum investment. All you have to be is a KYC compliant individual and you can start a mutual fund SIP from the comfort of your laptop or even a smartphone.

Why should one continue their SIP investment even in volatile market conditions?

When the markets are low, the NAV of mutual fund schemes may go lower. But this may benefit investors rather than affecting their investments. One good thing amount starting a mutual fund SIP is that you benefit from rupee cost averaging. So in volatile markets, if the NAV of a mutual fund goes down, investors get allotted more number of units in quantum with the investment amount. Similarly, if the NAV of a mutual fund scheme goes up, the investors are allotted lesser units. This adjustment is referred to as rupee cost averaging. Apart from this, the whole point of starting a mutual fund SIP is to not only give your investments a systematic approach but to also remain invested for the long run. Usually, mutual fund investments held for the long run tend to remain unaffected by the daily market vagaries. So if you are starting a mutual fund SIP, make sure that you continue investing.

Do not let your emotions come in the way of systematic investing. Think of this crisis as an investment opportunity rather than fearing about incurring losses. If you continue investing in mutual funds through SIP without breaking the continuation, in the long run, you might even benefit from compounding. Compounding has the power of turning small SIP amounts into commendable corpuses. So make sure that you are regular with your SIP investments so that in the long run, you are able to build a sustainable corpus.

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