There is one question that we get a lot these days – is this a good or bad time to invest in the markets via SIPs? So thought of answering the question a little more in detail, rather than just giving a superficial answer.
SIP’s as a concept are designed to manage volatility better by spreading the investments over time i.e. diversifying across time. If that is the case, logically, SIPs should be more effective when the markets are volatile.
But don’t take our word for it, let’s see what the numbers say. Suppose you start investing Rs 10,000 per month for the next 12 months in a mutual fund whose current price per unit is Rs 100. Let’s consider two scenarios:
1st Scenario: The markets are steady and the price per unit of the fund keeps on increasing by Rs 5 for the next 12 months. So, in the 1st month you will get 100 units (Rs 10,000 divided by Rs 100) , in the 2nd month 95.2 units (10,000/105) so on and so forth, until end of 12 months where the price per unit is Rs 160.
2nd Scenario: The markets are volatile and the price per unit of the fund keeps on decreasing by Rs 10 per month for the first 6 months till Rs 50, stays at 50 in the 7th month and then increases by Rs 10 every month till it comes back to Rs 100, the initial price after 12 months.
Without calculating, can you answer in which of the above scenarios will you make more money – Scenario 1 or 2?
If you do the math you find that you would have made more money in Scenario 2 i.e. when the price was more volatile. In Scenario 1, you would have ended up with approx. Rs 153,000 and in Scenario 2, you would have made approx. Rs 169,000 at the end of 12 months.
Unfortunately, majority of the investors start panicking when they see their SIP investments in red after 6 to 12 months and exit at a loss, I hope you will not commit the same mistake. When the prices go down, consider that the mutual funds are on sale i.e. you are getting the products at a discount.
All the market experts agree that the next 12 months are going to be very volatile and based on the illustration above, we believe it is a very good time to invest via SIPs.
The next logical question is, which type of funds should you invest in? The answer is in the SIPtm App so go ahead and explore.
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