The prices of stock continue to fluctuate with every transaction made in the market. When these fluctuations take place more often and the stock prices dramatically go up and down, it is known as market volatility. Higher volatility in stocks means high risk.
It is usually difficult to predict the movement of stock prices accurately. Investors, especially those who do not know much about market movements, tend to lose large amounts of their hard-earned money when they make rash decisions during these phases.
However, by investing in mutual funds via an SIP (systematic investment plan), you can generally beat market volatility.
How Can SIP Help Beat Volatility?
A systematic investment plan works with the concept of rupee cost averaging. It allows you to buy more units when the prices are down and fewer units when the prices are up as you keep investing regularly during different market cycles. Thus, the average cost per unit gets reduced.
Below is how rupee cost averaging works. For example, you invest ₹10,000 monthly through an SIP plan in a volatile market. Then your total investment at the end of a year will be ₹1,20,000. Check out the following table to see your pattern of investment and how many units you buy.
Net Asset Value
You can now see the benefit you receive at the end of the year. That is:
- The average cost per unit equals ₹15.38 (₹1,20,000/7800).
- The gain per unit amounts to ₹9.62 (₹25 - ₹15.38
- Your total gain is ₹75,036 (₹9.62×7800)
Through this example, you can see how you can beat the market volatility by investing in mutual funds through an SIP plan.
If you had invested all your money in one go in April at a net asset value of ₹25, you would have bought only 4,800 units (₹1,20,000 / ₹25).
The best thing about SIP is that it not just helps lower your average cost but automatically allows your portfolio to grow as you purchase more units at low prices and fewer at high prices.
Other Benefits of Investing Via SIP
- Calculate net worth: Using the net worth calculator by age, you can know how much you own minus the amount you owe.
- Low investment: Instead of a lump sum payment, you can pay in smaller fixed amounts as per your convenience.
- Compounding returns: As you pay your instalments, your SIP returns get reinvested. This creates a compounding effect to help accumulate more wealth, especially over a long tenure.
- Consistency: You can build a disciplined and consistent approach towards investment by putting money at regular intervals. This investment approach can help you achieve your financial goals better.
Consider opting for SIP to withstand market inflation, and make sure to use a net worth calculator by age to determine your total assets minus total liabilities.