Equity markets began the New Year on a volatile note on the back of growth and currency concerns in China. But have we seen such volatility (market noise) earlier? Yes, of course. In fact, equity markets are bound to be volatile, that’s their trait. Volatility is one of the biggest reasons why equity markets lack the fan following that traditional investments have. If you ask people about their discomfort for equities, they have a simple answer – ‘We want the higher returns from equities but minus the volatility’. Is that possible? May be, let’s try.

Have a look at the two pictures above and make a guess of what they represent. The first picture is simple - you see a bright moon in the skyline. The second picture is the tricky one. Any guesses? By the way, even this is a picture of the moon. However, the latter is a close-up of the moon’s surface (with craters) while the former is how the moon appears from earth. Clearly, the long view is much more pleasing than the short view.

                       Value of a Rs.5000 monthly SIP in the S&P BSE Sensex
                 for 20 years from Jan 1996 to Dec 2015 (Source of data – CRISIL MF Research Tool)

Now, have a look at the 3 graphs above. Each is the representation of a SIP (systematic investment plan) in the S&P BSE Sensex over a 20 year period. The first graph shows the cumulative SIP value at the end of every month over 20 years, the second graph shows the same value but once every 3 years and the third graph shows this value once every 5 years. Clearly, the first graph is the most volatile, the second indicates lesser volatility and the third is the least volatile.

To draw a perspective from both examples, we find that the long (term) view is much smoother (and pleasing) than the short (term) view.

So what are our learnings? Equity markets are volatile but most of this volatility is a short term phenomenon and likely to smoothen over longer periods of 5 years and above. For the majority who are staying away from equities for the sake of volatility, the solution is to adopt the long (term) route if you need a smoother ride. Just like the beauty of the moon can only be appreciated from a distance, the beauty of equity returns and its wealth creation ability can only be experienced provided you invest for the long term of 10, 20, 30 years. For beginners, you may start with smaller amounts of as low as Rs.500 – 1000 per month via SIPs in mutual funds, till you gain confidence, before raising the bar.

The New Year has just begun with some noise on the horizon, a good enough reason to look at equities from this newly learnt perspective.

Use the  SIP calculator online to calculate your returns on your monthly investments.

Past performance may or may not be sustained in future.