Investing in Volatile Market - SIP Investments

The best way to make money out of volatile markets is to correctly predict the market turning points. In other words – simply buy low and sell high! But as we know, it is almost impossible to regularly get this right – and constant efforts at market timing is what turns good long term investors into traders.

 

During the tremendous downturn of 2008, a lot of investors pulled out their money in panic.

 

In hindsight – which is always 20:20 as they say – these same investors were wishing they had invested in the falling market rather than redeeming their funds!

 

It is those investors who continued their investments, often via Systematic Investment Plans (SIPs) that benefited the most – and watched the profits pour in as the market reversed its downward trend and headed back up to 19,000 and 20,000 levels.

 

Systematic Investment Planning is investment process which helps you to regularly invest a pre-determined amount into mutual funds (equity, debt, or hybrid funds) at pre-determined dates. SIPs tend to be most rewarding when done into equity mutual funds, because equity by its very nature, is the most volatile asset class. Hence an SIP into an equity fund gives the greatest opportunity for to average one's costs over market highs and lows.

 

Taking a SIP instead of a lump sum investment, offers investors with the following advantages:

 

• Self Control
  Most investors find it difficult to resist the urge to try to time the markets. We all have the same weakness when it comes to a trying to catch a market low or a market high. But the task of doing this correctly all the time is incredibly difficult even for expert investors. An SIP helps to resist this urge by automatically making investments every month. Also, it helps to ensure that you invest regularly, and reduces the chances of impulse spending.


• Averaging your Costs
  If market lows (as experienced during the turmoil of 2008 and 2009), gave you a tough time, then SIPs would have been of help. By buying at various market levels, your investments would have been made at different NAVs of the mutual fund, therefore averaging your costs.
  SIPs work best in a falling market – they ensure that you buy when the markets are falling i.e. you Buy Low! It is only in markets that are continuously falling that an SIP would not be helpful. However over the long term, markets rise. That's when your SIPs would reap profits. While investing systematically in mutual funds, if you choose about 3 - 5 funds depending on your asset allocation and risk appetite, you can choose different SIP dates for your investments. This means you are investing on 3 or 5 different market days per month, instead on 1. So with 5 different schemes you can invest on 60 days in a year. This would help you average your costs over 60 market days instead of 12 market days. Thus, the more market days you invest for, the more you are averaging your costs and the greater the chances for better returns.
   
• Light on the wallet
  Many times it is not possible to invest a substantial amount in one shot. Investing via an SIP helps to invest even small amount at regular intervals. You can start an SIP with as little as Rs. 500 per month.
  
  Just remember to invest as much as is comfortably possible. Even a Rs. 500 increase in your SIP can have an excellent effect on your wealth over the long term.
  
  For example, if you were to invest Rs. 5000 per month into a well chosen equity mutual fund for 20 years, you would be investing a total of Rs. 12 lakhs. Assuming a 15% rate of return on equity over the long term period (in this case 20 years), your investment would grow up to Rs. 75.79 lakhs – a hefty amount!
  But if you invest just Rs. 500 more each month i.e. do an SIP of Rs. 5,500 instead of Rs. 5,000, your total investment would be Rs. 13.20 lakhs, which would grow to Rs. 83.38 lakhs!
  
  There are a few things to be kept in mind while investing in an equity mutual fund:
   
  • Establish your investment time horizon. Don't just keep on investing – know why you are investing (for your retirement, for your child's education, to buy a house etc) and once you achieve the corpus required, shift your money out of equity and put it in a safe instrument such as debt.
  
  
  • Equity Mutual Funds are subject to short term capital gain tax if redeemed before 1 year. So if you are doing an SIP of for example Rs. 1,000 a month i.e. Rs. 12,000 a year, and after 1.5 years your money has doubled due to excellent market conditions and you want to redeem Rs. 12,000 – then be careful of how many units you are redeeming. It is only the first 6 investments that are more than 1 year old. The later investments are less than 1 year old and are subject to short term capital gains tax.
  
  
  • ELSS schemes floated by fund houses from tax saving perspective have a lock in period of 3 years. This means that if you choose to do an SIP into an ELSS fund, each and every one of your investments is locked for a period of 3 years.
  
  
  • Choose your schemes well, preferably on the basis of unbiased well researched recommendations. If you do an SIP into a poorly performing fund with fundamentals that are not good, your investment may not perform the way you want it to.

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