Why SIP in Mutual Funds is the Best Choice in 2019?
The first week of 2019 has been quite uncertain for the equity market. In the previous 4 sessions, two ended in red and two in green. Experts are expecting the same kind of uncertainty before the general elections of 2019. In addition to this, weak global cues will also be a major factor for volatility in the market.
In 2018, we already witnessed how persistent market fluctuations can be and why a right investment mode is necessary to face the difficulties. So, today, we will see how SIP in mutual funds is the best choice for you in 2019.
Great in the Market Upside & Downside
A lot of investors think that volatility means market downside, but that is not the case. Market volatility means frequent changes in the performance of the market, and that change can be upside or downside. So, how actually can SIP work in the benefit of investors here?
Well, as you may know, that SIP or Systematic Investment Plan is a mode of investment where you invest a fixed amount of money into a scheme in fixed intervals. This investment amount gets deducted from your bank account automatically on the date that you have selected so that you don’t have to stress yourself out with manual transactions. Now, before we move forward, let’s have a look at a simple concept which is Rupee Cost Averaging.
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Rupee Cost Averaging: As we discussed that in SIP a fixed amount is invested in market upside and downside. Now, by investing at variable prices, investors get different units at different NAVs. At lower NAV he gets more units and at higher NAV he gets less mutual fund units. So, when this process continues, it is observed that the average NAV of the mutual fund units gets very lower as compared to the peak NAV. Let’s understand this with the help of a simple example. So, when this process continues, it is observed that the average NAV of the mutual fund units gets very lower as compared to the peak NAV. Let’s understand this with the help of a simple example.
|Date||Investment||NAV (Rs.)||Units Accumulated|
|Total Investment- Rs. 24000||Total Units- 637.32||Average Price- Rs. 37.67|
With the help of the above table, it can be seen that the peak NAV of the scheme is Rs. 50, and in the remaining 11 months, in 7 the NAV is Rs. 40 and above. Still, the average NAV of the schemes is just Rs. 37.67, which means, in the end, the investor is at profit.
So, in SIP, even when you face extreme highs and extreme lows, you don’t have to worry as the investments will prove beneficial in both of conditions.
Use This Strategy for a Much Better Growth
We discussed how SIP can help you in handling the expected market uncertainty of 2019, but there is another strategy that can help you in taking much better advantage of the volatility. Have a look at what that is.
When you start a SIP (Systematic Investment Plan) in a mutual fund scheme, that doesn’t mean that you are restricted to make further investments into that scheme. A large number of mutual fund schemes provide an option to make additional investments in the mutual funds. Through this mode in an ongoing SIP, you can make additional lump sum investments, anytime you want.
Now, when to make the additional purchase is the major factor. As you have seen in 2018 that equity mutual funds can face a drop in NAV to a great extent. So, the best time to make additional payments is at major drops. In 2019, if you see that your scheme has shown an unexpected drop in NAV and with a great margin, accumulate its units. By doing this, you will be able to buy more units at lower NAV, thus enjoying more benefits of rupee cost averaging. This will also help you in enjoying great growth when the scheme will start to show a recovery.
Hope you got the idea why SIP investment can be your best friend in the year 2019. Also, it is suggested you start now because the equity schemes have not recovered from the volatility of 2018, and thus are available at discounted prices, which will help you in giving a great start to your investments.
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