How Market Volatility Affects SIP Investments & What You Should Do?

The term that hits the panic button in even the most seasoned investor is “market volatility”.

It refers to unreliable variations and fluctuations in the stock prices or mutual fund Navs over some time. It is measured by the drastic ways the prices swing up and down in spikes and unpredictably. In short, it indicates the risk you anticipate while investing in market-related instruments. Since this is beyond your control, you can only resort to methods that can make this volatility work for you. Invest through a Systematic Investment Plan during these times, since fixed investments at regular intervals help average out the cost of purchase over time, gaining from both market highs and lows.

Understanding Market Volatility

A highly volatile market is usually linked to bearish market movement. The fluctuations in stock prices occur when normal demand and supply dynamics are significantly influenced by certain external factors :

1. Economic factors: Any change or even the news of a change in monetary policy or announcement of financial budget can substantially impact the market movements. The market reacts sharply to control of monetary policies by RBI (Reserve Bank of India).
2. Global Market Impact: The world is now a smaller place and events in one part of the world can influence stock markets in the other part as well. Government falls, wars, revolutions, and job recessions are bound to affect trade policies, supply chains and movements of foreign investments and hence market fluctuations severely.
3. Company Event Impact: Market movements can also be impacted indirectly by the reputation of a company. The public image of a company can drastically impact the stock prices and if it is a conglomerate will impact the market in turn as well.
4. Geo-Political Factors: International relations, restrictions, import-export imbalance and elections also affect market fluctuations significantly.

The smartest way to counter volatility is investing through a Systematic Investment Plan. it is a process of investing a fixed amount at regular intervals either monthly or quarterly in any mutual fund. When the market is high, you purchase fewer units and when it is low, you can buy a higher number of units. And over time, this averages out your purchase cost and manages to give you better returns by mitigating the market timing risk.

For instance, if you have invested Rs. 2000/- in a fund whose NAV is Rs.10, your SIP purchase will follow this pattern:

Total investment: Rs. 6000

Total no of Units: 711.11

Per unit Cost: Rs. 8.43

If you had invested a lump sum of Rs. 6000 in January, you would have gained only 600 units at the cost of Rs.10. But due to rupee cost averaging you only had to pay Rs.8.43.

How Market Volatility Impacts SIP Investments?

 Rupee cost averaging is the best strategy you can follow during a highly volatile market

through SIPs. Along with inculcating a disciplined investment approach, SIP also mitigates the risk and lowers the cost of purchase as you get more units when the market and NAVs are low and fewer when they are high.

You can have better clarity about the returns and gains through SIP by using a tool called SIP Calculator. It shows you the estimated returns you may get if you stay invested for 5 to 10 years and you will be astonished to see the returns. You can use a SIP calculator to understand how cost-averaging affects returns over the years.

It is indeed upsetting to look at the overall returns in your portfolio during a market dip. However, historically market trends show potential recovery over time. Hence it is in your best interest to stay invested and take advantage of the market downturn in SIP mode.

Staying invested during a bearish market is awarded when the market bounces back and you can expect a rewarding return for your patience. It ensures your ultimate wealth accumulation throughout the investment. You can check your potential returns through a SIP Calculator for clear estimation and informed decisions.

What You Should Do During Market Volatility?

First and foremost you should never go for panic selling. Mutual fund investments require caution and patience both. You should control the urge to exit from SIP and continue investing to gain maximum from rupee cost averaging. The longer you stay invested, the better returns you can expect. Especially if you can predict it is a short-term market fluctuation.

On the contrary, you should increase the invested amount if financially viable. It will help you purchase more units when market conditions are low and will ensure higher returns in the long run. You can again use the SIP Calculator to understand how further funding can significantly impact your wealth accumulation.

Diversification of your portfolio dilutes the risk associated with volatile market conditions. Additionally, if you invest in SIP mode in diverse asset classes like equity and debt, it doubles the chances of your better return and ensures stable returns over time. However, without a doubt,  align your fund selection with your financial goals and risk averseness.

Along with caution and patience, focus on your financial goals can help you make the right decisions about your portfolio. As SIP is a long-term process, use it for your long-term goals like child wedding, retirement planning or wealth creation along with the investment rather than as a tool to garner quick returns.

Another lucrative feature of this mode is Step Up SIP where you have the option to invest more as your income grows. A SIP calculator will show, the impact it has on your final wealth accumulation over the years. The enhancement in your total corpus would pleasantly surprise you.

Reviewing your portfolio is essential but avoid frequent churning as it may impact your gains considerably. Frequent fund hopping depending on short-term market trends is often counterproductive. A stable and consistent approach to investment is often beneficial for the overall wealth creation objective. It is prudent to avoid timing the market.

Conclusion

Be it bearish or bullish, SIP stands as a reliable and effective way of staying invested in the market under any situation. Its rupee cost-averaging technique and compounding benefits not only ensure you a better return but also build a disciplined investment habit that offers a stable approach to wealth accumulation rather than quick returns. It requires caution, focus and patience which paves your way to financial success.