Since August 2018, Nifty has lost 762 points (10.6%), from 11,346.2 to 10,224. With stock markets falling, many investors are worried about poor performance of their equity investments and wonder if they should continue investing in their monthly SIPs.
It is obvious for the investors to feel discouraged as their investments are earning negative returns due to the recent market fall. The point most investors miss out on is a fairly obvious one – that markets will improve and get better. Stock markets always perform in cycles
By looking at 10 year Nifty price chart, it becomes very clear that markets are always an opportunity to invest and over a longer period, stock market returns will surpass any other investment product’s return.
Mutual fund returns have fallen in line with markets in the past month. From a longer term perspective, these dips are temporary. The markets will bounce back and investors should avoid knee jerk reactions and should continue with their SIPs. Over a longer time frame of 5-7 years, equity markets will go through a number of ups and down, which will help investors in rupee cost averaging.
The concept of rupee-cost averaging allows an investor to keep the purchase cost averaged by buying units at different prices based on market circumstances.
By investing a fixed sum at fixed intervals, you can buy fewer units when the price is higher and more units when the price is lower.
Buying more units at a lower price averages the cost per unit of the fund leading to greater gains when the market is in a bull phase.
Put another way – if you had invested over the past 2 years, stopping now will be the silliest thing to do, because then you would have purchased unites at higher prices and will miss out on purchasing the same at lower prices.
Golden Rule of Investing in Stock Market
If an investor stops his SIP investments in falling markets, he misses an important averaging opportunity, which will reduce the efficiency of his SIPs and its long term performance. This is because when markets are trading higher, they have bought units at higher and higher levels. What went up slowly has now fallen as a lump sum.
Correction in the market provides an opportunity to bring costs down. SIP’s returns are maximized only when costs are minimized. Thus, this is the time to continue your current SIPs to bring down your cost.
Other Reasons Beyond Cost Averaging
[1] Timing the Market – It is said that investors should “spend time in the market instead of timing the stock market”.
Interesting article to read – Timing The Stock Market: Right Time to Buy & Sell
[2] SIPs are for Long Term Goals – By stoping/pausing SIPs, you are defeating the very purpose for which you started your SIPs .
SIPs help retail investors reduce the risk of timing the market and average costs over time, by buying more units when prices are low and fewer units when prices are high.
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