It is next to impossible to correctly predict stock market movements. This is where SIPs come in as they eliminate the risk of timing as you make your contribution regularly unaffected by market ups and downs.
Rupee cost averaging
SIP allows you to invest little money over time, which may benefit from stock market volatility because anyone who invests a fixed sum at fixed intervals during any period when prices fluctuate will buy more mutual fund units when prices are low and fewer units when prices are high. This phenomenon is known as ‘rupee-cost-averaging’.
The advantage of rupee cost averaging is that the cost of buying NAV of the fund that you invest in averages out as you buy units at different NAVs at different times.
Let us understand with an example of investments of Rs 1,000 every month over a 12-month cycle. As you can see, NAV of the fund goes up and down each month while your investment are the same. Over time, averaging helps make market fluctuations work for you, and reduces the risk of investing all your money in one go.
SIP to ride volatility
For investors, market ups and downs are always a cause of concern and nervousness. A way out from such a scenario is to invest through SIPs. SIPs not only minimize the risk of losses due to fall in equity markets but also save you’re the hassle of timing the markets, that is, investing when the markets are down and exiting when they are rising.
In contrast, lump sum investments run the risk of ‘bad timing’ or buying a large amount of investments just before prices fall. But regular savers reduce that rise by spreading their investments over a longer period of time through SIPs.
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Through SIPs you invest a set amount frequently, like every month regardless of how the markets fare. Over the years, you’ll but mutual fund units at varying prices levels. As a result, the average price per unit of your investment may be lower than if you invested all your money at once. More importantly, you avoid the temptation of trying to time the market.