Should you stop your SIPs in market crash?
For the small investor, the market crash has come as a rude shock. Short-term vs long-term. When will the markets rise or fall, is anybody’s guess. This, however, should not change your goals. So, how do you invest in the market, ride the volatility and still reach your financial goals? The short answer is systematic investment plans.
And there are only two things that small investor can think of doing:
One: Sell all stocks and funds (even if it means booking a loss!)
Two: If the loss is too much to book, simply stop any future investments, especially Systematic Investment Plans (SIP).
“But contrary to investor perception, this is the best time to (buy more and) average out,” says Sandeep Shanbhag, Director, Wonderland Investment Consultants. “And SIPs are an ideal vehicle to do that. SIPs should be continued to benefit from the lower prices prevailing now,” he advices.
Here’s why:
1. You get a low average cost price
SIPs work on the fundamental principle of Rupee Cost Averaging. Since SIPs entail regular investments, over a period of time, your cost of purchase gets averaged out.
This example will show you how. Let’s assume you invest Rs 1,000 per month for six months with SIPs.
| Month | Amount Invested (Rs) |
Unit Price (Rs) |
Units bought |
| 1 | 1,000 | 25 | 40 |
| 2 | 1,000 | 21 | 48 |
| 3 | 1,000 | 20 | 50 |
| 4 | 1,000 | 18 | 56 |
| 5 | 1,000 | 22 | 45 |
| 6 | 1,000 | 23 | 43 |
| Total | 6,000 | 21 (average price) | 282 |
You get 282 shares at an average price of Rs 21.
Had you invested the entire amount in the very first month, when the price of the share was Rs 25, you would have got 240 shares. So, rupee cost averaging leaves you with 282-240 = 42 more shares in just six months.
Note that you buy more units when the price is low.
This of course is just a six month period. Over a longer period of time, when the market ups and downs are more pronounced, SIPs help fight volatility.
How to invest in an SIP?
All MFs have predetermined dates of any given month on which an investor can make regular investments in SIPs. For instance, if you receive your salary on the first of every month, you can choose seventh or tenth of every month as your SIP date.
But if you get your salary by the month-end, the first of the following month would be the ideal, as you wouldn’t want your money lying idle in the bank account for long.
MFs also provide direct debit facility with all the major banks. You can also give post-dated cheques (at least 12) to the MF.
Source: moneycontrol.com
Labels: mutual funds, financial planning, stocks and funds, fixed income, market crash, systematic investment plans, SIPs, rupee cost averaging, indian stock market
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