What is the better way to achieve a goal: to be systematic and disciplined or make random decisions? We know and understand the power of discipline in our lives. Similarly, being systematic and disciplined with our money is a powerful trait which can help an individual achieve his/her goals in a comfortable manner.
It is natural for most investors to be on the fence when the market is volatile. It is understandable that it is not easy to keep cool when the portfolio is in red and the investment value is steadily declining. At such times, an investor may think that not investing or withdrawing investments made so far might be the best action. After all, this will help protect capital from further downside. But this an erroneous approach. While trying to time the market may look good on paper, history has time and again shown that it is a losing proposition.
During volatile times, the optimal approach to investments is through Systematic Investment Plan (SIP) or Systematic Transfer Plan (STP). Through either of the routes, an investor instead of running away from volatility will take advantage of volatility by investing in a systematic manner. Being systematic here means investing in mutual funds at regular predetermined intervals.
When you start Investing
SIP is one of the easiest ways to take exposure to equities through the mutual fund route. Through SIP, an investor can average cost of investment as one will be staying invested through various phases of the market. So, there will be times, when the market is down, the investor will be allotted higher number of units and vice versa. And when the markets rebounds, the value of each unit will also increase, and the value of your investments will also increase. So, when looked at this arrangement over long term, it helps to average out the investment cost.
Continue your SIP
It is extremely common to have second thoughts about your investments when the market is volatile. However, if you have already invested in mutual funds, staying invested and continuing your SIP is the right approach. When investing through SIP an investor is not taking a call on whether the market is cheap or expensive or is volatile. The focus here is on goals and this keeps the investor away from a harmful exercise known as timing the market. Too many investors have lost out on attractive investment opportunities just because they were trying to time the market.
Apart from these, an investor also benefits from compounding when investing through SIP over long term. Compounding plays out as gains get reinvested which over a period of time will help create exponential wealth. As a result, by focusing on your goals and continuing your SIP, you might be able to fulfil your financial goals faster.
Do an STP when Investing Lump sum
When it comes to investing lumpsum into equities, unless the market valuation is very cheap, it is advisable not to invest the entire amount in one go. There is an alternative that one can consider and that is using the power of Systematic Transfer Plan(STP).
Here, lumpsum investment is made into a debt mutual fund and from this fund an STP is set up which will transfer money into an equity mutual fund of investor’s choice at an interval the investor chooses. By moving money into an equity fund gradually, investment cost gets averaged out over time. Investing in a staggered manner into equity funds also help reduce short-term risks to your assets due to market volatility. With STP, you gain all the benefits of equity and systematic investments.
So, do not wait for the perfect time to invest the entire amount in one go but use tools such as STP to make the most of the market opportunities.
As an equity market investor, one cannot escape market volatility. But we can definitely navigate volatile times by making systematic investments. Stay focused on your goals and use simple but effective tools like SIP and STP to achieve your financial goals.