The markets have been choppy lately for past four months and are reflecting the drunken movements of a ship in turbulent waters. As always happens in similar times, we have started fielding the familiar questions from worried customers – Is the India story dead? ; Should we get out of the mutual funds now? ; You said I’ll get good returns – see them now; I’m not even getting the FD returns on my investments; or worse – Get me out of these funds before its too late even if I have to pay tax and exit load on them!
This is the same story every time. A large number of investors get into equity mutual funds when the markets are doing well with the avowed aim of investing ‘for the long term’. But the moment there is some volatility, their ‘long term’ perspective becomes ‘short term’ in no time and they get out. Consequently, they get in at high rates, get out in panic at lower rates, and the cycle continues. They almost never get to see the returns that equity investments give in the long run, always maintain that equity should be avoided at all costs. Their long-term ‘real’ requirements suffer due to short-term ‘notional’ losses and they would revert to so-called safe investments of FDs, post-office products and insurance policies which would invariably give them negative post-tax-and-inflation returns, thus effectively eroding the purchasing power of their money.
The Business line newspaper column (Dated 14 June 2015) reproduced below gives out this same theme.
Don’t let market turbulence scare you. SIPs work well only because equity investing is a roller-coaster ride
‘Buy low, sell high’ — lesson 101 for success in investing is really a no-brainer. But for us emotion-driven humans, this cardinal principle is easier said than practised. When the market turns choppy, as it currently has, many of us panic and stop our systematic investment plans (SIPs) in mutual funds.
Don’t make this mistake. SIPs work great in the long run precisely because the equity investing is a roller-coaster ride.
In a SIP, you invest a fixed sum at regular intervals to buy units of mutual funds. The number of units you get depends on the prevailing net asset value (NAV) of the fund at the time of investment; the higher the NAV, lesser the number of units you get. And lower the NAV, higher the number of units in your kitty.
So, when the market and the NAV fall, you accumulate more units of the fund. This results in what is called ‘cost averaging’ — your average cost of acquiring the mutual fund units comes down.
In the long run, despite the volatility during interim periods, equity as an asset class and well-run equity mutual funds should see their values trend higher. Your return will be maximised when the average cost of investment is minimised.
This happens when you buy cheap, making a falling market the best time to invest in SIPs.
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