There is a famous Greek philosopher, Heraclitus, who stated that “Change is the only constant”.
This philosophy perfectly describes the market. There are investors who see market volatility in a negative way, however, whether the market goes up or down, it still keeps on moving forward! Investors who understand this go along this curve, and end up creating enormous wealth even when the market is volatile!
The question is how do they do it? What investment strategy do they apply? Let’s see.
power of sip in a volatile market:
invested in SIP consists of investing a fixed amount regularly, irrespective of the market cycle. It is believed to be an ideal way to invest in mutual funds. The deduction of the amount is based on an auto-debit facility. This means that every month on a fixed date the amount of SIP will get deducted. You can choose your date of deduction according to your wish. Investors can purchase a fixed number of units through SIPs in the stock market regardless of market conditions.
Indian SIPs now have crossed the RS12 crore mark a month, which is above 1 trillion a year. Households in India are shifting from real assets, bank deposits, and life insurance products to more efficient and transparent mutual funds. The majority of this SIP book has been built in the last three years. New investors have not experienced a long and deep market crash.
The journey of SIP in India goes back to 1993 when Franklin Templeton Mutual Fund introduced it. Since then, SIP has seen many financial crises one of which was the Great Recession of 2008. When incidents like this happened, many investors got scared by the thought that their investments shave half their value because of the crisis.
The situation was that if you had invested Rs. 1 crore in an index fund in Sensex in Jan 2008, its value was shelved down to Rs, 41 lakhs by March 2008. The chaos of selling created sheer panic among the investors.
However, there were some brave-hearted investors who held on to their investments by being loyal to their long-term investments. Slowly and steadily market gained momentum & these long-term investors saw their investments getting recovered!
Considering 2008’s global recession, we have here, analyzed the SBI Bluechip Fund Reg G with a monthly SIP amount of Rs 2000. However, we recorded the NAV on the 1st of every month from March 2006 to 2021.
Source: Sharat’s Newsletter
As the market was down in 2008, the Net Asset Value (NAV) dipped in this graph as it varied over time. From the graph, it can be seen that those who had invested in 2007 or earlier suffered a loss in 2008. Investors who are smart will continue to invest in the mutual fund without stopping their SIP.
Investing through SIPs is beneficial for all kinds of investors because this is a highly flexible method of investing. In comparison to lumpsum investments, SIPs offer many advantages.
Thus to conclude we can say that for a monthly invested in SIP of Rs.2000 that took place with SBI Bluechip Fund, your initial investment of Rs.2,76,000 will become Rs.6,46,529 after a period of 10 years, i.e if the rate of interest is 134.24% in 10 years with a net profit of Rs 3,70,529.
2008 Lehman’s lessons are the most important for an investor. The first whiff of a longer market crack will make you panic and sell your investments if you haven’t planned ahead. Selling in panic and buying based on greed will cost you. You will lose money and trust in the market if you do this.
From this example, we can conclude that investments through SIPs are a relatively safe bet to ensure substantial returns after a considerable period of time.
Averages out rupee cost:
By investing a fixed amount regularly, investors can average out the purchase costs of stocks or mutual funds. During low market conditions, they buy more units. In a rising market, they get fewer units. When the market is low, SIPs help investors invest more, and when the market is high, they reap the rewards. Over time, this process helps them generate wealth.
The compounding benefits of SIP investments motivate investors to remain invested even during extreme market fluctuations. Due to compound interest over time, investing a small amount every month through a SIP can generate great wealth over the long term.
Promotes discipline and consistency:
No matter how high or how low the market is, the SIP investment process forces the investor to keep investing regularly and remain invested. In order to accumulate many units, investors need to stay invested for the long term and ride out some volatile moments. They can continue to invest if they have a long-term perspective and see their investment value compound into significant capital over time.
Investors must continue to invest periodically using SIPs to average out risk over a long period of time during the market fall in order to average out the risk.