The mutual fund space in the country has evolved greatly. And like all other evolutions, this happened in stages too. Where close-end plans once dominated the market, open-end ones are greatly popular now. The market has also shifted from regular plans to direct plans, and from high commissions to low commissions. Amid these scenarios, the idea and concept of SIPs have also taken off and gained great popularity. A lot of investors now understand the merit of SIPs and prefer to invest in equities to lump sums.
SIPs are just a systematic way to invest your money. When you invest periodically, typically every month, you also become very disciplined about the entire process. Moreover, SIPs also help you to navigate market volatility easily.
Volatility is an integral part of the market, and cannot be avoided at any cost. Thus, there is a strong need for a mechanism that can counter this volatility. And this mechanism is a SIP. Investing periodically over long periods means that you invest at both highs and lows of the market. When you invest when the market is high, your SIP gets you fewer units. On the other hand, when you invest at market lows, the same SIP will fetch you a greater number of units. Overall, this then averages out your investment cost.
Markets can be unpredictable. No one is certain about whether it will rise or fall. Waiting for the right time to invest in the market means that perhaps that time might never come. A slump can go on for months, or a rally can go on for years. Thus, SIPs help you to get rid of the dilemma of figuring out when to invest in the market.
Investors also tend to have a lot of biases that then go against their investment outcomes. For instance, a lot of investors stop their SIPs when they realize that the markets are falling since they are afraid of losing their money. Similarly, many investors start their SIPs in a rallying market. SIPs help to overcome all these inherent biases and notions.
However, for a SIP to work in your favor; you need to keep them simple. There are so many variations of SIPs available out there today. Some even let you keep your investment amount as a variable. And while this sounds convenient, it ultimately compromises on your discipline. At the cost of saving money for the long run, investors then spend their money on frivolous expenditures.
There is also another variant of SIP that allows you to invest more or less depending on the market. Thus, if you have an understanding of the market, you can invest more when the market is down; and invest less when it is rallying. Even this concept comes with its problems. If the market keeps rallying over the years, this will then diminish your corpus. And since ours is a developing and high growth economy, the stock market often shows extended rallies and shorter slumps.
It is best to keep your SIPs simple. Do not innovate them too much to increase your returns. There are chances that you might just get the opposite result. Stick to the regular monthly option that suits most of us. Remember, the strength of a SIP lies in its simplicity.