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Mirae Asset Mutual Fund explains how SIPs may help investors deal with market timing in the latest article of the ’Passively Active’ series, an investor awareness initiative by the fund house.
Systematic Investment Plans (SIPs) is a way of buying mutual fund units at a particular time period with a certain amount. Investors have the flexibility to choose SIP frequency like monthly or quarterly and SIP amount, which generally starts Rs.100 in many passive funds.
SIPs in passive funds particularly index funds and fund of fund (FoF) is a cost effective way to accumulate mutual fund units. It may not only help you create wealth, SIPs in index funds and FoFs might help you beat market timing.
Let us look at how the SIPs in the index funds might beat market timing.
Through rupee-cost averaging
SIP means that the investment is spread over different market conditions, buying more units when markets are low and fewer units when markets are high. SIPs in the index funds averages out the cost of investment over time.
This process of investment minimizes the risk of investing a lump sum at the wrong time and ensures that you accumulate MF units irrespective of market conditions.
May mitigate the human bias
Investment is often a process of making predictions about the market movements which may involve some human bias like confirmation bias, recency bias etc.
On the other hand, SIP is a pre-determined investment process with a predetermined amount being automatically deducted from the bank account. It enforces discipline and removes emotions from the investment decisions.
Effect of compounding
SIPs, with regular and continuous investments, allows the power of compounding to work over a longer period of time and helps in significant wealth creation.
Forces investors to stay in market for longer duration
SIPs in index funds mean that the investor is staying in the market for a longer period of time and the historical data about the market returns imply that the staying in the market for a longer time period gives better returns than exiting and entering the market again and again.
It is said that the ‘time spent in the market beats timing the market’.
Conclusion
Summing up, SIPs enable investors to deal with market volatility and create wealth over the long term. Overall, SIPs in index funds combine cost efficiency, diversification, and averaging benefits which may help it to beat market timing in terms of returns.
Disclaimers
An Investor Education and Awareness Initiative by Mirae Asset Mutual Fund. All Mutual Fund investors have to go through a one-time KYC (Know Your Customer) process. Investors should deal only with Registered Mutual Funds (RMF). For further information on KYC, RMFs and procedure to lodge a complaint in case of any grievance, you may refer the Knowledge Center section available on the website of Mirae Asset Mutual Fund.
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