Market fluctuations are common in the financial world. With increased volatility, risk factors are more likely to increase which in turn may result in low returns. Investors, therefore, constantly look for means and methods to adjust their investment strategies in order to handle volatility in the best possible way.
Investing in Systematic Investment Plans
One of the numerous ways of dealing with market volatility effectively is by investing in Systematic Investment Plans (SIPs). According to such a system, you may make small payments at regular intervals of time. The amount is invested in various diversified investment vehicles so as to build wealth over a period of time.
A major benefit of a SIP is that you may make an investment with a small sum of money. In this way, you do not have to pay a lump sum amount at one go. Based on standing instructions, the amount gets automatically deducted from your bank account on a pre-defined date.
Due to its unique benefits, mutual fund SIP helps in tackling market fluctuations adequately.
Following are four reasons why Systematic Investment Plans helps counter market volatility.
- Rupee cost averaging
Systematic Investment Plans perform better than lump sum investments. The main reason behind this is the concept of rupee cost averaging. It acts as a cushion against market fluctuations by averaging the total cost of investment. You may, therefore, purchase a higher number of units when the market falls, and lesser units as the market trend rises. Therefore, the average cost of investment does not get impacted negatively.
- Smaller investment amount
You may make an SIP investment on a regular basis, say monthly, quarterly, half-yearly or yearly, based on your finances. You may invest a small sum of money on a regular basis, thus inculcating a habit of disciplined savings. Further, investing a small amount helps in tackling fluctuations in an effective manner so as to create long-term wealth.
- Power of compounding
A Systematic Investment Plan is a powerful tool that helps you benefit from the power of compounding. Through this snowball effect, your earnings will help generate even more earnings. You may, therefore, earn an interest on your investment, along with any other interest or capital gains, so that your money can grow faster over a period of time.
- Market timings
Quite often, you may witness market volatility on a short-term basis. However, if you are looking towards making long-term investments, you may benefit from SIPs. You may overcome an unstable market by investing in a Systematic Investment Plan. Through its steady track performance, you may even-out the volatility of the equity market effectively.
Every investor needs to be wary of the volatility while investing in equity markets. You may, therefore, invest in an SIP and counter market fluctuations easily.
