You must be well-versed with the adage – slow and steady wins the race, with ‘steady’ being the word to emphasize on here. This popular concept works for wealth creation as well and is a fundamental concept of one of the most popular forms of disciplined investing methods, i.e. a Systematic Investment Plan, widely known as SIP.

Before we discuss your ideal strategy in a volatile market, let’s understand the meaning of SIP.

What is an SIP?

SIP is an investment vehicle offered to investors, wherein they can periodically invest a small but considerate amount towards their chosen mutual fund. The investor can decide specifications such as the frequency of the investment, the investment amount, and the date on which it takes place. SIP investments aid in mitigating risks and instils discipline investing among investors.

If you are still wondering how does SIP work, it’s quite simple. Investors choose their preferred mutual fund schemes after considering their financial goals and investment horizon. They then regularly invest a fixed amount to achieve these goals. SIP auto-debits the predetermined amount from your bank account at predetermined intervals and invests it directly in your preferred scheme(s). A certain number of units are bought from your invested principal, depending on the current market price of the financial instrument.

Stock market volatility is the range of the price change a particular security experiences over a given time. A security is believed to be less volatile if the price change is relatively stable. However, a highly volatile instrument tends to move erratically, hits new highs and lows quickly, and has dramatic falls and rapid increases.

Since investors tend to experience the pain of loss more acutely than the joy of gain, a volatile stock that moves up as often as it moves down is frowned upon by a majority of the investors. However, seasoned investors use this as an opportunity to make money.

Risk-averse investors can turn to SIPs as they are one of the best way to invest in mutual funds when the market is volatile. You ask why? Read to know how mutual fund SIPs are a boon to modern investors.

Rupee Cost Averaging

SIP investments are generally preferred by those who have a long-term investment horizon but can only dedicate a limited amount to their goals. Here, periodic investments in SIP help catch the market at different prices. This way, you can buy more units when the markets are low.  this means that you’d buy fewer units when the markets are high, but since you are invested for a longer duration that witnesses both highs and lows, you tend to average out the cost of buying units. This concept is known as Rupee Cost Averaging.

Power of Compounding

Compounding is when your interest earnings are added to the principal amount to increase future returns. It is called the power of compounding because you earn interest on interest. The power of compounding works in your favour if you are invested for the long-term in the right security. By investing your money regularly, you tend to put your money to work and seek to generate wealth in the long term.

Tips to follow during a volatile market

 Following are a few SIP tips to follow during market volatility:

1. A falling market can be a good opportunityA falling (low) market is considered as an opportunity to invest more at a lesser price. Rather than seeing it as a misfortune, purchasing more units when the markets are low will aid in bringing down the average cost of the unit.
2. Do not indulge in panic sellingFund managers always advise their clients to avoid reacting to knee-jerk reactions in the market. Instead, investors must make active use of the corrections and indulge in cherry-picking stocks.
3. Give way to goal-based investingOutline your investment objectives at the very start. Investors must understand that in a gold-based investment strategy accompanied by a multi-year time horizon, market volatility is your friend. When investors make decisions based on market sentiment, they are prone to higher losses. A long-term investor can, however, overcome these short-term losses by being patient.
4. Do not discontinue your SIP investmentsTo get the most out of an SIP, you are mandated to stay put during the good and the bad times, including during volatile times in bad market conditions as well. Remember, it’s just a phase and you’ll get through it. The point is that if you ignore stock market disruptions and stay invested through the course of the investment, you might end up making a considerate amount of money.

While everyone’s financial situation is fairly unique, SIP can be your solution to overcome volatile and unstable markets as it’s almost impossible to time the same. What’s more, unlike lumpsum investments, SIP is not heavy on your pockets.

Happy Investing!

SIP does not assure a profit or guarantee protection against loss in a declining market and should not be construed as a promise, guarantee on or a forecast of any minimum returns.