Fight Market Volatility by investing systematically
Indian stock markets have been pretty volatile since the advent of global recession. The uncertainty is such that markets can take a plunge in one day and rise up again on the very next day. Also due to increased media attention that financial markets are receiving these days, the investors have become apprehensive in investing lump sum amounts in stock markets. Investors who have invested in mutual funds through the SIP route have been successful in negating the uncertainties caused due to stock market fluctuations to a large extent.
Systematic Investment Plan (SIP) and Systematic Transfer Plan (STP) are two different routes of investing in mutual fund in discipline and systematic manner. SIP as well STP is possible in all kind of open ended schemes whether equity, non-equity or balance MF schemes. Equity is more volatile in nature and hence, more and more people invest in equity scheme through SIP or STP route.
What is Systematic Investment Plan (SIP)
Systematic Investment Planning or SIP as they are commonly referred to is an option offered by the mutual fund houses to invest a fixed amount regularly at a fixed interval on the predetermined date. Common frequency offered by the fund houses is monthly and quarterly. SIP helps investors to buy more units of scheme when the market are low and provides opportunity to investors to make profit when, the stock market move up by selling a whole/fixed portion of their units.
What is Systematic Transfer Plan (STP)
Systematic transfer plans (STPs) are suitable for investors who have a lump sum amount to invest, but want to proceed with the SIP way. STP has features and benefits similar to a Systematic Investment Plan. Only difference is that unlike SIP where the fixed amount is debited form investor’s bank account on a predetermined date to be invested in a scheme of a mutual fund, here investor parks a lump-sum amount in a less volatile scheme like liquid or money market mutual fund and gives a standing instruction to the fund house to transfer a fixed amount on a predetermined date in another scheme of the same fund house.
Advantages of choosing the SIP or STP route
The main principle behind SIP and STP is cost-averaging. Therefore, the advantage of systematic investment may be limited when the stock market is continuously on the rise. However, it is considered a suitable mode of investment given the fact that it does not burn a hole in the investor’s pocket. On the other side, investing a lump sum amount at the wrong time can adversely affect your returns. Investing through SIP or STP route also gives the opportunity to make the best utilisation of every fall in the stock market.
Today the mutual fund houses provide innovative options to invest via STP route. You can now invest in weekly and even daily STP apart from the traditional monthly and quarterly modes.
Let us look at some of these investment options.
1) Flexible SIPs
This method provides the investors with wide flexibility in order to plan his investments according to his financial goals.Scheme is designed in such a way that investor invests more when the markets are down and continue with normal STP in a bullish market.
2) Trigger option
Trigger option enables investors to book profit automatically at a pre-defined time or value.Under this facility, investor can specify a specific event, which may be related to time or value, in advance and when this event takes place the trigger is activated. For instance, investor may indicate the Sensex level as the trigger to redeem or switch from one scheme to another.
3) Daily & Weekly SIPs
If you are worried about the market index declining when the designated monthly date of SIP approaches, you have the option to spread your investment across the month by opting for daily or weekly investments. However, daily mode is not endorsed by most of the fund houses because it is operationally inconvenient and also because it serves no purpose for the investor. However, weekly options are less taxing for fund houses in terms of operational costs and beneficial for investors to invest tracking the volatility of fund markets.
The Thing to Do when Markets don’t Perform Well
It’s almost impossible to time the market and therefore investing through SIP routs pays in long term. The worst thing, of course, to do would be to discontinue your SIP as soon as the markets start underperforming. If you remain disciplined and continue to invest during this phase, you stand to gain in the long run when the market index climbs up. However, if you abandon your SIP halfway and redeem your units, then you tend to miss out on the appreciation of your equity MF portfolio when the market recovers from its bad run.
Time Frame
A frequent question asked by investors who wish to invest through SIP is the time frame of investment. Your financial goals and priorities should be considered before deciding on the time frame of your SIP. Equity has potential to deliver higher returns in long term hence it makes sense investing in Equity Mutual Fund schemes for five years and more. Also, real benefit of rupee cost averaging can be observed only in long term. For building corpus linked to your short term goals like contingency Fund, investing in a liquid fund through SIP route for a short period can be considered.
A SIP offers the double benefit of negating the market volatility and combating the unpredictability in rupee value while gaining optimum benefits from the equity markets. A SIP guarantees a disciplined investment irrespective of the market swings and helps you to reap from the benefits of compounding.
