Using SIP for investment during COVID19 outbreak
The Covid-19 pandemic has wreaked havoc over the entire world. The busiest of the cities have witnessed prolonged silence. As the world goes into a lockdown, and with no cure in sight, the situation is expected to worsen. The market has seen sharp correction over the course of a few months, owing to the disruptions in supply chains, fall in oil prices, worldwide lockdown and the rising uncertainty in the minds of investors. In such mayhem, how about using SIP for investment during COVID19 outbreak?
Investors are running from pillar to post to pull back their invested capital in market-linked securities. However, that is exactly what investors are recommended not to do. Financial decisions taken in a moment of panic can have dire consequences. Steep market corrections offer investors the opportunity to grow their wealth. By acquiring equity stakes at all-time low prices you may later sell them when the market bounces back. Similarly, investors can also invest in Mutual Funds using SIPs. You would buy fund units at cheap Net Asset Value (NAV) which may substantially appreciate in the long term.
Use this once in a blue moon opportunity of steep market correction to enter the market, if you haven’t already. And the best way to do this is to start with the Systematic Investment Plan (SIP) of Mutual Funds. SIP allows investors to make regular investment of small amounts of money in mutual funds at predetermined intervals. While lumpsum investment requires one to time the market, so as to invest at a favourable price, SIP comes with the in-built mechanism to average out the cost of fund units.
Why is lump sum investment not a good idea, at this point of time?
Well, the simple answer for this is that we aren’t sure how much the market will further tank, if it will. When we decide to invest in bulk in a mutual fund, thinking that that’s the lowest the market will fall, and it will only raise post this, but the truth is, one can never be so sure about the equity markets. Its uncertainty defines it. It might happen that the NAV of the fund may fall further in the coming months. Lump sum investment will strip you away from the chance of buying fund units at lower price, unless, you’ve extra capital to invest again. This uncertainty is best catered to, by the Systematic Investment Plan of mutual funds.
Also Read: 5 Things to Check for Choosing a Mutual Fund
How will using SIP help during the Covid-19 outbreak & Market Crash?
When the economy is in full swing, and the equity market is at an all-time high, delivering exponential positive returns, everyone is attracted towards it and wants a share. However, when the same market enters a bearish phase, just like it has entered now, and portfolios start reflecting negative or low returns, a myriad of investors choose to stop their SIPs. Although, this decision to halt the SIPs cannot be more wrong.
A bearish market such as this, has often been seen as the best time for investors to leverage the possibility of making huge capital gains. SIP helps to tone down the losses during a market correction. This happens because of the rupee-cost averaging feature of SIP.
Rupee Cost Averaging
Rupee Cost Averaging is an investment strategy which eliminates the need to time the market. Through SIP one invests a pre-decided amount in the fund which essentially ensures that one buys fewer units of shares when the markets are expensive, and more units of shares when the markets are cheap. This practice reduces the cost per unit. Ultimately, investors end up with better returns at a lower risk. Let’s understand this with a hypothetical example.
Let’s suppose you start a SIP of ₹5,000, which is deducted every month.
In a bull market, if the Net Asset Value of the fund is ₹50, you’ll get 100 fund units in a month.
When the market crashes and NAV of the fund falls down ₹20, you’ll acquire 250 fund units in a month, if you choose to continue your SIP. In the long run, you’d have accrued a substantial number of fund units, and when the market bounces back, you’ll be in a better position as opposed to investors who stopped their SIPs during a market correction.
In essence, the fundamental idea to properly leverage the benefits of SIP, it becomes all the more important to stay invested in times like this.
If you’ve bought fund units during a bullish phase, continuing your SIPs in this phase is the best way to go forward. Buy more fund units at a cheap price, to reduce your overall average purchase price of units. When you sell the units after staying invested for a long period of time, the returns generated will be exponential.
What kind of Mutual Funds to invest in?
Studying the market trend, it is best to stay away from small caps and mid caps, at least till the volatility settles. You can consider investing in these funds, once the market starts to recover. As of now, you can start a SIP for large cap funds, if you haven’t already. If you already have a SIP for any large cap fund, it is advisable to continue it, during this bearish phase.
The strongest antidote to a market crash is patience. The key idea is to sail through this phase without reacting to alarmist headlines or panicking unnecessarily. The market sentiment, media headlines tend to do more harm than good in times like this. It is necessary to ignore them for a while, before the dust settles down. Sound investment decisions and a long term investment horizon will definitely aid in growing a good corpus of wealth. Happy Investing!
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