Millions of investors have switched to systematic investment plans (SIPs) of mutual funds over the last few years. Accorded to a recent Crisil report, SIPs accounted for an inflow of over Rs 8,000 crore a month as of September 2019. The mutual fund industry has emerged to be stronger than ever despite the credit defaults in the debt market and the volatile equity market during the last year.
Given the current bear market, many investors are concerned about whether they should continue their mutual fund SIPs. Here’s why you should not discontinue your SIPs, especially when the markets are down.
SIP, over the years, has turned out to be the most viable option for millennial investors who neither have the time or adequate resources to start investing on their own. An SIP brings in a disciplined approach towards investing in mutual fund schemes by allocating equal amounts regularly to accumulate wealth over the long-term.
Rupee cost averaging
One of the significant benefits of an SIP is that it controls the risk of investments through rupee cost averaging. This allows investors to purchase more units during a bearish market, i.e. when the prices of the units are low. Since keeping track of the market and timing your purchases can be quite a hassle, SIPs allow you to bring down the average cost per unit through rupee cost averaging. Continuing your SIPs during a bear market gives you more value for money, which, in turn, will increase your returns when the markets regain lost ground over time.
Power of compounding
Compounding is an exciting concept where the return earned on the investment is reinvested to add to the initial capital, which increases your principal/capital for the next compounding period.
Let us consider an example. Let’s assume that you invest Rs 2,000 per month in SIPs on a particular mutual fund scheme which offers a 14 percent rate of return a year. At the end of the first year, you would have earned an interest of Rs 1,900. Now let’s consider a scenario where you invest the same amount in the same SIP for a more extended period, say five years. After the end of the fifth year, now you would have earned an interest of over Rs 54,000. In the same line, continuing the same investment for 10 years or 20 years would earn you a return of Rs 2.84 lakh or Rs 21.53 lakh respectively. Why is there such a huge difference? This is due to the power of compounding. The longer you stay invested, the higher your returns shall be.
Markets always tend to pick up over time. Terminating your SIPs during a bear market will not only defeat the purpose of compounding but also bring down your corpus by a considerable margin. Hence, investors are advised to continue their SIPs even when the markets are performing poorly.
A bear market allows you to buy more units at a lower price and later accumulate better returns when the market rises. Mutual fund houses have also come with a top-up facility when you can increase your SIP amount. You could choose to avail the facility which will then allow you to purchase more units, accumulating wealth for your future
Archit Gupta is the Founder and CEO of ClearTax.
First Published: IST