Take the SIP route to harness volatility

Volatility is back with a vengeance in the stock market and experts say that the more than 1,000 points daily swings of the Sensex will continue till the current covid spiral abates. Panic reactions by new short-term investors are fanning the volatility. “There is too much speculation, mostly by people who entered the market in the past year. Since speculation is a zero sum game, gains of experienced big bulls and bears that constitute around 2-3% of the market participants will come at the cost of small traders. The biggest losers will be the new entrants,” says C.S. Sudheer, CEO and Founder, IndianMoney.How should retail investors manage their equity investments now? While retail traders may get burnt due to the ongoing volatility, there is no need for long-term investors to panic because this will get over in some time. The situation is similar to what happened during 2020 after the deep cuts of March- April. Make the most of itExperts say systematic investment plans (SIP), also known as rupee cost averaging, is the best option for retail investors now because it helps to harness volatility in their favour. Through SIPs, you invest a fixed amount on a regular basis and continue for the long term. Though you can do SIPs in individual stocks, it works better with mutual fund schemes because mutual funds allow small investments, usually as little as Rs 500 per month. Ability to buy fractional units is its other advantage. For example, if the NAV of a scheme is Rs 23 and you are investing Rs 1,000, mutual funds will allow you to buy 43.48 units.This fixed investment per month is the cornerstone of rupee cost averaging. Since you are investing a fixed amount per month, you get more number of mutual fund units when the NAV is low (ie when the market is down) and less number of units when the market is up. This process is similar to buying more when the price is low and less when it is up and therefore, bring down your average cost of holding over time. This is why experts ask you not to stop SIPs during volatile times. “Rupee cost averaging works only if you continue during volatile times. Therefore, investors should continue with their SIPs in periods like this,” says Deepesh Raghaw, Founder, Personal Finance Plan. 82229742The impact of rupee cost averaging—the reduction in average cost of holding—will be small when volatility is low and vice versa. Let us assume that you are investing Rs 1,000 per month in an equity scheme. To avoid individual scheme performance impacting this analysis, we used the oldest open-ended index fund, UTI Nifty Fund, as the proxy (see table). The SIP in actual NAVs (which kept changing according to market volatility) generated better SIP returns compared to hypothetical NAVs (which moved up in straight lines during the analysis period). This analysis shows why retail investors should continue with their SIPs during volatile times.Do not overdo it Now another important question: should retail investors tinker with their SIP amount and increase it to benefit from the current volatility? Experts are not very enthusiastic due to various reasons. First, marketwide valuation is still high and therefore, the time is not yet ripe for increasing SIP amounts. “No need to increase allocation now because many companies are still in overvalued zones,” says Sudheer.Second, sticking with pre-determined SIPs help investors avoid behavioural problems that happen during market volatility, mostly triggered by mood swings between greed and fear. “Increasing equity investments during small corrections and stopping investments, even regular SIPs, when the market falls further is the most common mistake most investors make,” says Raghaw.Experts also say there is no need to increase the tenor of SIPs, like stopping monthly SIPs and starting weekly SIPs, to benefit from the current volatility. “Volatility is part and parcel of equity and a weekly or monthly SIP will not make much difference in the long term, say 10 years. Continuing with monthly SIPs is fine because most people get their salary on a monthly basis,” says Chandan Singh Padiyar, a Sebi registered investment adviser (RIA). Investors should consider the convenience factor also because operational issues may crop up if they try to split their monthly SIPs into four weekly SIPs. “It is better if investors fix one day close to their income date for all their SIPs. There are chances of money remaining in their savings account getting used for other purposes if SIPs are spread out and the last SIP becomes due at the end of the month,” says Jitendra P.S. Solanki, RIA.Graphic by Sadhana Saxena/ET Prime

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