SIPs or Systematic Investment Plans are a popular investment avenue for Indian investors to invest in mutual funds. By allocating a fixed sum every month, SIPs help investors average their purchase cost over different market levels and remove emotions from investing. However, what should investors do during periods of high volatility and weakness in equity markets? This article will explore the logic and benefits of increasing SIPs during such times.
Using market downturns to your advantage
Equity markets are inherently volatile and corrections of 10-20% are quite normal from time to time. However, it is during such periods of weakness and increased volatility that long term investors have an opportunity to buy more units at comparatively lower market levels. By increasing SIP amounts systematically during downtrends, investors can lower their average purchase cost over the long run.
For example, if an investor was investing ₹5000 via an SIP every month in an equity mutual fund. During a market correction, the NAV comes off by 15-20%. This investor increases the SIP amount to ₹7500 for 6 months. Over the long term, this strategy would result in purchasing more units at lower levels, thereby boosting potential returns.
Step-up SIP – A built-in advantage
Several mutual fund houses offer the facility of step-up SIPs that allow automatic increase in SIP amounts at pre-defined intervals. For example, an investor can start a step-up SIP of ₹5000 per month in a multi-cap fund which increases by 10% every year. In the first year, SIP amount would be ₹5000, in the second year it will increase to ₹5500 and then ₹6050 in the third year and so on.
Equity mutual fund SIP calculator tools can be used to analyze how a step-up SIP can lower average cost and boost long term returns through rupee cost averaging.
Timing market corrections is difficult
While increasing SIPs during downtrends makes logic sense, perfectly timing the market is next to impossible. Markets can remain volatile for long periods, and it is uncertain how low they might go. Therefore, investors should not try to actively time the markets or wait for a ‘perfect’ opportunity.
A better approach is to have a step-up SIP facility in place or selectively increase SIPs by 10-15% incrementally every 3-6 months. This provides flexibility to systematically deploy surplus cash during intermittent periods of volatility over the long-term investment horizon.
Consider raising SIPs based on personal circumstances
Instead of market timing, individual financial circumstances should also guide decisions to increase SIPs. For example, bonuses, arbitrage gains, new income streams etc. can be leveraged to temporarily boost investments. Similarly, during parenting leaves, job transitions or early career stages, increasing SIPs may not always be optimal from a liquidity standpoint.
Personal cash flows, liabilities and near-term financial goals play an important role. Therefore, asset allocation should be reviewed periodically based on both market conditions as well as individual risk profiling and financial planning.
The power of compounding is time’s greatest ally
It is the power of compounding earned over long durations of 15-25 years that can truly multiply wealth generated from equity investments. By systematically increasing investments during periods of uncertainty, investors can take advantage of the rupee cost averaging effect. This can significantly lower the average cost of units purchased and therefore boost potential long term returns through the magic of compounding.
While markets will continue fluctuating in the short run, disciplined long-term investing via SIPs helps investors ignore noise and focus on their most important financial priority – growing wealth for lifetime financial goals and a secure retirement.