Monday, 9 April 2018

SIP

Don’t stop SIP despite Market Volatility



Don’t stop SIP despite Market Volatility
SYSTEMATIC INVESTMENT PLAN
We recently saw a news that mutual funds AUM fell by 21000 crores in February and falling markets being the main reason for the outflow. Yes, we have a falling and volatile market now but does it mean that you should stop SIP? let us see in detail why you shouldn’t stop an SIP in volatile market.

Humans are closely associated by behavioral biases and most of our decisions are based on this kind of biases. For example Indian cricket team has toured several times to South Africa but they have never won a test series recently. If India tour next time irrespective of Indian teams form we would most likely think that South Africa would win the series. This is called recency bias, where we mostly rely on recent happenings and deciding based on that. Similarly everyone thought Kohli and co will fail in ODI series in South Africa after losing the test series but finally India won the ODI series first time in South Africa beating the recency bias of several analysts.

This is a bias, several investors are affected by. Yes markets are choppy and volatile, just because it’s falling today we shouldn’t think that this fall is going to be permanent and stop your SIP investment. The main reason is to do an SIP is rupee cost averaging where you get to buy mutual funds when market is high as well as low and when once downturn ends and markets move up you get more returns.

Ok, I think you are still not convinced?. Yes it’s still the recency bias that is not allowing you to hear the truth. Let us go to a real-life example.

This happened in the year 2007, there were 2 friends Aakash and Deepak, they both wanted to accumulate money for their wedding expense. So they started an SIP of 5000 per month for 7 years. Aakash did not mind anything about the markets irrespective of either it was going up or down as his goal was long term. On the other hand Deepak stopped SIP in March 2008 and rejoined again in April 2011 once markets became stabilized according to him. However he invested the amount that he missed in SIP as lump sum when he rejoined and withdrew their money on April 2014. Let us see what was the corpus both of them made.


Do you wonder how Aakash got more corpus?, this is because he was investing during downtime where he was able to get more units for the same SIP amount. Whereas Sandeep was out of the market during downtime and did not gain as much as Aakash in rupee cost averaging.

SIP is a mode that keeps emotions away from investing for long-term wealth creation. As they say in sports “Form is temporary, class is permanent” applicable for equity investing as well, the volatility is temporary whereas growth is permanent. In turn the volatility is our friend that helps us to generate more wealth as we get more units during downtime.

Hence we recommend you not only to continue your Sip in volatile market but also to invest some lump sum amount during down times that would give you extra benefit over long-term wealth creation.


Posted by at

No comments:

Post a Comment

Subscribe to: Post Comments (Atom)