If you are among those who are scared of stock market volatility, systematic investment plans or SIPs will work best for you. SIP is an option designed by mutual funds, allowing you to invest a small sum in the stock market on a regular basis. The main advantage of a SIP is that it averages out your cost in the long run as an investor gets more units when the markets are down.
The periodicity of a SIP can be determined by one's cash flow and can be increased with a rise in income. In brief, a SIP helps you grow even a small investment into a large corpus, thanks to the power of compounding. The trick is to start early.
"SIP is better as it averages out the purchase cost rather than lock up the money at a particular NAV as in lump sum investments," says Neil Parag Parikh, Chairman and Chief Executive at PPFAS Mutual Fund.
"SIP ensures investments are not hurt too much by market falls. You convert market falls into investment opportunity by buying more units," says Vidya Bala, Head, Research, FundsIndia.
The minimum investment in most funds is as low as Rs 500, which enables small investors to purchase this option. SIP is a better choice because if you make a lump sum investment when the market is up, you run the risk of eroding your investments during the next market dip. However, you also have the chance of earning higher returns through a lump sum investment when the markets are at their lowest. But considering that the markets are volatile, it is always difficult to determine which way they will move.
Recently SIPs have become hugely popular in India with around Rs 4,000 crore flowing into the market every month via SIPs. Consider this: Domestic institutions put into Indian equities Rs 37,200 crore in 2016/17 at a time when the foreign portfolio investors' inflows touched a five-year low at Rs 18,800 crore. While foreign institutional investors will continue to play a key role in all emerging markets, the role of domestic institutions such as mutual funds is bound to grow. Also, limited returns from other assets mean people will continue to show a preference for equities, especially equity mutual funds.
Sunil Sharma, Chief Investment Officer at Sanctum Wealth Management, says, "For domestic investors, households equities and financial assets should be the predominant wealth-building vehicles. As for domestic triggers in the near term, the market will be driven by domestic earnings announcements and further by the rollout of the Goods and Services Tax, continued reforms, government spending and the rate of transmission to businesses and consumers."