- Date : 28/06/2020
- Read: 3 mins
- Read in : हिंदी
Panic, anxiety, and market volatility during COVID-19 is more detrimental to your money than the virus itself. Know how mutual funds work and why SIP is the best choice given the current scenario.
A Systematic Investment Plan (SIP) is an effective and extremely popular method of investing money in mutual funds these days. However, when stuck in the middle of a pandemic, our wits often succumb to panic decisions. Caught in a global fight of equity gains, 2020 is a year for rebalancing portfolios.
The aftermath of COVID-19 is affecting individual lives as well as the market. This often convinces investors that straying from their long-term goals is the only solution when investing in mutual funds. But contrary to popular belief, data from the Association of Mutual Funds in India (AMFI) revealed a threefold increase in investments in the past 10 years. In fact, the assets under management (AUM) of the mutual funds industry currently stands at Rs 23,93,486 crore (as on 30 April 2020).
So, here are four reasons to stay invested in SIP.
1. Rupee cost averaging
SIPs follow a disciplined method of regular investing even when there is a continuous slump in the market. As a beginner, you will not have to time the market, which spares the effort of investing a lump sum amount at peak prices. This methodological approach to investing allows you to put in small fixed amounts at regular intervals, enabling you to buy additional units when the price is low, and less when the price is high. In the long run, you average out the cost of acquisition of your units.
2. Power of compounding
When you begin investing in SIPs early and follow through, you can expect long-term gains through the compounding effect. With several years to nurture and grow, your returns are reinvested, which helps you to accumulate more units. This enables your dividends to earn compounded interest over time. Try to secure long-term returns by starting early and staying strong even through market fluctuations.
3. Asset allocation
Unlike coronavirus, SIP is not a novel concept. A method that allows you to set aside a stipulated sum of money to be invested each month in a fund of your choice is a great investment plan. However, to get more out of your investment during market fluctuations, asset allocation is highly effective in building wealth. So, try for a dynamic approach between equity and debt. Allocate funds towards equity when the market is low and more to debt when the market is high.
One of the biggest benefits of investing in SIPs is that they allow you to start with as little as Rs 500 a month. When large chunks of money are difficult to set aside for investment, a SIP acts as a tool to ensure you follow financial discipline. Moreover, you have the freedom to choose instalment periods based on your financial standing. You can pay weekly, monthly, quarterly, or even annually.
Related: Can you beat the slowdown with SIPs?
At a time when the Sensex has fallen over 4000 points, a sense of helplessness among investors may seem inevitable. But there can be no doubt that SIPs are the best option during times of market volatility. As an efficient method to keep your investment growing, they eliminate the biggest hassle that investors face – timing the market. Here's a step by step process to starting a SIP.
Disclaimer: This article is intended for general information purposes only and should not be construed as investment or tax or legal advice. You should separately obtain independent advice when making decisions in these areas.