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Here's How You Should Invest in Volatile Markets Such As These - Outside View by PersonalFN

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Here's How You Should Invest in Volatile Markets Such As These
Sep 16, 2015

Potential to generate high returns is something that attracts investors to equity. Everyone wishes to enter when markets are low and exit when they are at the peak. However, it is impossible to accurately predict the market direction every time, irrespective of market analysis and research. Take 2009 for example, a large number of investors missed the reversal of stock markets and lost opportunities to buy when valuations were really cheap. On the other hand, in 2013 many retail investors exited from the markets.

As quoted by Live Mint (as on Apr 28, 2014), during 2013-14, the number of investor folios for equity schemes fell by 40 lakh. Thus timing the market and following market momentum can prove to be disastrous to your objective of wealth creation as the risk involved is quite high. As a result of this, people often face setbacks in their portfolio value and fearing volatility, conclude that equities are not meant for them.

What should you do?

Although volatile, equities have the potential to outperform most other asset classes, if invested in prudently. If you don't have the time and expertise required to invest in stocks, you must invest in equity oriented mutual funds. These funds invest the investors' corpus in a variety of stocks thereby reducing the risk involved in single stock investing. While investing in these schemes, you should opt for the Systematic Investment Plan (SIP) route of investing in mutual funds as this lowers the risk involved in equity investing by making market timing irrelevant.

Let us understand some more advantages of SIP investing

  • Absorbs the shocks of volatile markets: As you invest a fixed amount every month through SIPs (say Rs 5,000), you might be able to buy more units at low prices and less units at high prices. Thus, it is possible to lower your average cost of investments via SIPs as opposed to lump sum investments where you face the risk of investing a larger amount at high prices.

  • Smaller investments: Sometimes people are not comfortable with setting aside huge sums of money every month to invest in the equity market. Through the SIP route, you can invest as little as Rs 500 per month. Thus, this route enables you to invest in equities even with small amounts.

  • Instills discipline amongst investors: Another crucial advantage of investing through this route is that it makes us disciplined investors by instilling a habit of saving in us. Our daily lives are quite hectic and it is easy to forget the fact that in order to meet goals it is very important to invest regularly. If you invest through SIPs, the fixed amount will directly get debited from your account if you opt for the direct debit or ECS facility. Thus, you don't need to remember to make your stipulated investments every month.
Lump sum vs. SIP mode of investing
Date of investment Mode of investing Returns generated (CAGR)
Oct 01, 2010 Lump sum Rs 3,00,000 12.0%
Oct 01, 2010 to Sept 01, 2015 Monthly SIP in XYZ Fund (totaling Rs 3,00,000) 18.3%
Data as on September 01, 2015
Note 1: Monthly investment through SIPs were assumed to be made on 1st of every month between
October 01, 2010 and September 01, 2015
Note 2: Calculations are based on real data obtained from ACE MF

As can be seen in the table above, an investment of Rs 3,00,000 in XYZ mutual fund (name undisclosed purposefully) would have generated higher returns if invested via monthly SIP route for a period of 5 years, starting from 2010 to 2015.

PersonalFN is of the view that investing in the equity markets via SIPs will help you meet your important goals. However, remember that simply investing through SIPs in any mutual fund won't help you to build the desired corpus. It is very important that you start SIPs in winning mutual fund schemes. However, it is extremely important to consider your risk appetite, time horizon and asset allocation strategy before making any investment.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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