Systematic Investment Plan is a regular, disciplined and long term approach for a sound financial health though investment returns are subject to market risks. Simple savings will erode in value given the prevalent inflation and marginal income tax slab. One must consider real rate of return that is deduced when inflation rate and tax rate is removed from the nominal rate. SIPs are beneficial for those who would like to save on regular basis, rather than investing a lump sum. High net worth individuals could also opt for SIPs which has twin benefits in the form of rupee cost of averaging as well as power of compounding.
Equity markets are likely to remain volatile till the pandemic dust settles down, which no one knows when that would happen. The long term economic impact of the pandemic would be known over a period of time post uncertainty is over and a steady uptrend in quarterly GDP emerges. While there are apprehensions in the mind of investors about uncertainty, volatility and economic downturn yet volatility favors patient investors, who have ability to continue with the investment as cost of averaging comes into play, others may opt for temporary pause until normal income stream resumes/restored. Though equity MF SIP inflows have been on the rise for last 6 months barring April'20 month when we have seen marginal dip of 3% i.e. Rs 265 crore (see the table) yet full impact of pandemic will be known when figures for the coming months are released by AMFI.
In this para, let us try to understand investor behavior during uncertain times. A conservative investor might pause the SIP(s) post witnessing equity market fall of 8-10% whereas a moderate investor would be market agnostic who would continue SIP(s) irrespective of market movement. In the case of an aggressive investor, a 8-10% drop in the equity markets would lead to additional investment in 2-3 tranches. In the current scenario, when NIFTY has corrected by almost 28% to around 9,000 levels from its peak of 12,430 attained in January 2020, it makes sense to continue with SIP(s) in order to derive cost of averaging for a longer period of time. The correction in mid-cap and small-cap stocks is much deeper, which could be considered as good investing opportunity from long term point of view. Thus, investor behavior gets determined based on the risk appetite of an investor. The opportunity cost of a conservative investor, who pauses SIP(s) post 8-10% correction, is huge when considered for a long period of time via-a-vis moderate and the aggressive investors when absolute gain figures are compared. Patience has always paid rich dividends to equity MF investors when empirical data is seen though nothing is guranteed.
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