Many investors feel nervous when markets go up and down. But did you know that market ups and downs can help you if you are investing through an SIP? In this article, we will understand why a mutual fund SIP investment works comparatively better in a volatile market than in a flat or stable market.
Let’s start with the basics.
What is an SIP?
SIP stands for Systematic Investment Plan. It is a way to invest a fixed amount in a mutual fund regularly – usually every month. It helps you invest in a disciplined way without worrying about timing the market.
When markets go up, your investments potentially grow. When markets fall, you get more units for the same amount. Over time, this balances out the cost of investment.
Flat market vs volatile market
Flat market: This is when the market stays at the same level for a long time. There are no big ups or downs. Prices stay relatively stable, and there is little growth.
Volatile market: This is when the market keeps going up and down. Some days it rises, and some days it falls sharply. This can make investors nervous.
But for an SIP investor, volatility can actually be a good thing. Let’s see how.
Rupee cost averaging – The key to SIP investing
One of the biggest benefits of a mutual fund SIP investment in a volatile market is rupee cost averaging. It simply means that you buy more units when prices are low and fewer units when prices are high.
Let’s take an example*:
You invest Rs. 1,000 every month in a SIP.
In January, the NAV (Net Asset Value) of the fund is Rs. 50. You get 20 units.
In February, the NAV drops to Rs. 40. Now you get 25 units.
In March, the NAV rises to Rs. 55. You get 18.18 units.
Total investment = Rs. 3,000
Total units = 63.18
Average price per unit = Rs. 3,000 ÷ 63.18 = Rs. 47.48
*For illustrative purposes only.
Even though the NAV went up and down, you ended up getting a good average price. Over time, this can help you grow your wealth steadily.
In a flat market, the NAV might stay around Rs.50 the whole time. You would get 20 units every month. Your average price remains Rs. 50.
But in a volatile market, you get chances to buy at lower prices, which brings your average cost down. This gives you more benefit when the market goes up again.
Power of Compounding + SIP = Potential long-term growth
Another reason SIPs do well in volatile markets is compounding. The units you collect at lower prices grow in value when the market rises.
Let’s say you bought 25 units at Rs. 40. Later, the NAV goes up to Rs. 60. Your 25 units are now worth Rs. 1,500 – a 50% gain. (Example is for illustrative purposes only).
SIPs work potentially well when you stay invested for the long term and let the ups and downs balance out. The longer you stay, the more time compounding has to work in your favour.
To see how much your SIP can potentially grow, you can try a mutual fund SIP calculator. It shows the potential value of your investment after a few years, based on expected returns and SIP amount.
Why volatility is your friend in SIP?
Here are a few reasons why volatile markets help SIP investors:
Lower average cost: As we saw earlier, rupee cost averaging helps you buy more when prices fall.
Higher gains when market recovers: Units bought at low prices rise in value when markets recover.
Removes emotion from investing: With SIP, you invest regularly, no matter what the market is doing. This builds discipline.
Better long-term results: Volatility may look scary in the short term, but it can boost your returns over time if you stay invested.
Example: Flat market vs Volatile market
Let’s say you invest Rs. 1,000 per month for one year in two different market conditions.
Flat Market:
NAV stays Rs. 50 throughout.
You get 12 x 20 units = 240 units
Value at year-end (assuming NAV is still Rs. 50) = Rs. 12,000
Volatile Market:
NAV goes up and down from Rs. 40 to Rs. 60
Due to rupee cost averaging, you get more units when the NAV is low
Let’s say you end up with 260 units
If NAV at year-end is R S. 55, value = 260 x 55 = Rs. 14,300
Even though the market moved up and down, you ended up with more units and better returns.
What should you do?
If you are an SIP investor, here are a few simple tips:
Don’t stop your SIP when markets fall – It’s actually a good time to keep going.
Think long term – SIPs give relatively better results over 5 to 10 years.
Use a calculator – A Mutual Fund SIP Calculator can help you set your goals and track your plan.
Stay consistent – Investing regularly is more important than timing the market.
Volatile markets may seem scary, but they can actually help your mutual fund SIP investment. By buying more units at lower prices and benefiting when markets recover, SIPs turn short-term noise into long-term growth.
So, the next time you see the market going up and down, don’t panic. Just stick to your SIP. The plan is already working for you, even when it doesn’t look like it.
Disclaimer:
CBD:
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The information on this website is for informational purposes only and is not a substitute for professional medical advice, diagnosis, or treatment. Always seek the advice of your physician or another qualified health provider with any questions regarding a medical condition or treatment. Never disregard professional medical advice or delay seeking it because of something you have read on this website.
Gambling:
As per the Public Gambling Act of 1867, all Indian states, except Goa, Daman, and Sikkim, prohibit gambling. Land-based casinos are legalized in Goa and Daman under the Goa, Daman and Diu Public Gambling Act 1976. In Sikkim, land-based casinos, online gambling, and e-gaming (games of chance) are legalized under the Sikkim Online Gaming (Regulation) Rules 2009. Only some Indian states have legalized online/regular lotteries, subject to state laws. Refer to the legalities here. Horse racing and betting on horse racing, including online betting, is permitted only in licensed premises in select states. Refer to the 1996 Supreme Court judgment for more information.
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