Posted On Friday, Sep 18, 2015
All eyes were fixed on the US Federal Reserve on Thursday as it was to announce its decision on hiking interest rates in the US. To the relief of stock markets globally, it decided to maintain status-quo – to keep rates at the prevailing near-zero levels. The Fed cited worries about the global economy, financial market volatility and sluggish inflation at home for not raising rates yet, but left open the possibility of a modest policy tightening later this year.
The Indian stock markets, welcomed the decision, and the S&P BSE Sensex closed 255 points higher. A rate hike in the US, whenever Fed takes the inevitable decision, is expected to affect the global markets and especially emerging markets like India. Bulky foreign inflows, particularly from US investors could be withdrawn to find their way back to their home markets, causing much volatility.
That said, volatility is the nature of the markets, and this is truer when one looks at it from the short term perspective. In the long term however, the India growth story is intact, and investors who take the right calls will be duly rewarded by the markets. What could be the ideal investment call for times like these? We believe it is to, stay invested, stick to a Systematic Investment Plan (SIP), and not make calls based on market levels. SIPs are suitable for an investor because they offer 4 important benefits as described in the paragraphs below.
What is an Systematic Investment Plan?
An SIP is a mode of mutual fund investing that helps you to invest regularly in order to meet your financial goals effectively. It allows you to invest the same amount, in a particular mutual fund scheme, at a specified frequency. It may be daily, weekly, fortnightly, monthly, or quarterly depending on your choice.
The four great benefits of SIP:
Benefit #1 Market timing becomes irrelevant
One of the biggest difficulties in equity investing is WHEN to invest? Apart from the other big question WHERE to invest? While, investing in a mutual fund solves the issue of where to invest, SIP helps us to overcome the problem of when to invest.
SIP involves disciplined investing irrespective of the state of the market as SIP investors buy even when the markets are low. When the markets are high, it may not be prudent to commit large sums at one go, thus balancing your portfolio. This makes timing the market less relevant, therefore reducing your worries about the state of your investments in volatile markets.
Benefit #2 Reduces the average cost
In SIP one starts investing a fixed amount regularly. Therefore, one ends up buying more number of units when the markets are down and NAV is low and less number of units when the markets are up and the NAV is high. This is called rupee-cost averaging. Generally, those who are not well versed with the swings of the market would stay away from buying when the markets are down. They mostly tend to invest when the markets are rising. Starting an SIP tends to bring discipline to our portfolio as SIP investors buy even when the markets are low, which actually is the best time to buy.
Benefit #3 Power of compounding
Compounding is the ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings. In simpler words, the interest you will earn from your invested amount will be re-invested, and thus increase your principle amount. Starting a Systematic Investment Plan (SIP) will help you harness the power of compounding as you invest a set amount every day/week/month etc irrespective of the wild swings of the market.
A Small Saving, a Modest Fortune
What you save every day
How much it could earn every year
You will have
*The numbers used in the table above are for illustrative purposes only
Benefit #4 Does not strain our day-to-day finances
Mutual Funds allow us to invest very small amounts (starting from Rs. 100/-) in SIP, as against larger one-time investment required, if we were to buy directly from the market. This makes investing easier as it does not strain our finances. SIP, therefore, becomes one of the ideal investment options for a small-time investor, who would otherwise not be able to enjoy the benefits of investing in the equity market. Large investors who wish to accumulate their savings prudently might opt for a larger SIP amount.
However, do your research before starting an SIP in a mutual fund. Do not select a fund merely on rankings and ratings. While investing, have a long term approach and select the fund whose investment objective matches your financial goals and needs. Do consult your financial advisor for assistance.
Disclaimer, Statutory Details & Risk Factors:
The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Please visit – www.quantumamc.com/disclaimer to read scheme specific risk factors.
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