Don’t you love to live life on your own terms? Maybe you are not someone who loves the mundane or follow a daily routine. Probably your heart races at the thought of facing life’s unpredictabilities and uncertainties. You live for the excitement, the thrill, those challenges that life has to offer.
But it becomes difficult to bring the same attitude towards your hard-earned money. Especially when you have invested a substantial part of your savings in mutual funds and the market seems to be on a downward curve.
Does market turbulence cause you to tremble in fear of losing money? Fear is an attribute easily appended to a fluctuating market. Most investors subscribe to the notion that an unstable market will cause them enormous monetary grief.
Their fear is unfounded as the notion is partly a myth. It just does not hold up. In fact, market volatility isn’t always a bad thing. You can actually benefit from it. Sounds strange? Implausible?
Read on to find out how this is possible.
Let’s start by having a look at everyone’s favourite long-term investment strategy – SIP.
SIPs or Systematic Investment Plans help you build your financial corpus by consistently investing a certain sum every month over a long period of time in mutual funds. This amount can be as low as Rs 500 a month.
When the markets are in a bearish phase, stock prices and Net Asset Value or NAVs of mutual funds are low, as mutual funds are market-linked investments. In this situation, you can acquire more units with the sum invested. And similarly, when the market is bullish and the prices of stocks and NAVs are high, you gain from your earlier investments, since they are valued higher now.
Volatility in equity markets helps build long-term returns. If markets move only upwards, all SIP installments would happen at a higher cost, since you would be buying units at a higher price. Corrections and fluctuations give you the ability to take advantage of lower prices. If you remain invested patiently and relentlessly stick to your SIPs, you can easily meet expected long-term returns.
Since with SIPs you are investing regularly, irrespective of whether markets go up or down, you tend to balance out your cost per unit. This is Rupee Cost Averaging and in fact, your market risk falls on the lower side. And over time, you make more money just because of these fluctuations.
Volatility helps you average out all negative returns in the long run and you get an optimal value of your investments. The market will be bullish and bearish over the years, and in both of these phases, you can make the most of the volatility by sticking around. Plus, you have the benefit of time. You can afford to stay invested for long if you start early, and that is what makes all the difference in leveraging market volatility to your benefit.
During a bullish market phase, you brought 100 units @ Rs 10 each. Now, as the market continues to fluctuate, the value of your units is reduced to Rs 8 each. It’s easy to lose calm, right? But what if you went ahead and got 100 more units? After a dull, dreary phase, the market caught up again and the value of your investments shot up to Rs 14 each. So, not only did you make a handsome profit on your existing investments, but you also managed to add a significant amount to your portfolio.
A major increase in your portfolio size comes from the fresh investments you make in the initial years. Hence, even if there’s a down year, the percentage increase in the portfolio will only grow.
So, the key is to stick around and not panic. Most investors panic the moment they hear the markets drop and start withdrawing the money. But, as a very famous pop song goes, how will you enjoy the highs when you haven’t seen the lows?
With SIPs, you can be rest assured that these highs and lows are evened out in the long run, to give you the best possible returns on your investments.