A volatile market can shake the best of equity investors. Guided by the intrinsic emotions of greed and fear, we invest when the market rises, sometimes even at premium valuation, and sell when the market falls, sometimes even at a loss. One needs to behave rationally to beat the emotional conundrum while investing. Consider systematic investment plans (SIP) to beat volatility. They are not new to mutual fund investors. We are aware of their benefits - rupee cost averaging, disciplined approach and negating the need of market timing. This article attempts to build a case for SIP as a weapon to combat volatility and explains how it helps create wealth in the long term.
Remember, volatility is but for a moment
History has proven time and again that the equity market is highly volatile in the short term, but always moves up in the long term. Further, it should be noted that equity investments via mutual funds have fared better than direct equity investments thanks to professional management.
So, what is a relatively safe long-term horizon? Performance of equity mutual funds, (represented by CRISIL- AMFI Equity Fund Performance Index) shows that minimum returns from equity investments increase and concurrently volatility decreases over a wider time span of typically 10-15 years (highlighted in Chart 2).
Past Performance may or may not sustain in future. Average rolling returns for various periods since April 1997. Volatility represented by standard deviation.
Watch this space for more as we will continue the ‘Combat volatility with long-term SIP’ series in coming few articles with more useful insights on the topic.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.