Equity as an asset class is known for its inherent volatility, which can make investing in equities a daunting task for many investors. However, equity has time and again proven to be one of the best performing asset classes over the long term. While an investor cannot completely avoid volatility when investing in equities, one can definitely take measures to optimally manage volatility and also benefit from it.
Systematic investment plans (SIP) are an excellent way of tiding over volatility and creating wealth over long periods. Below are some reasons why you should consider investing through an SIP today:
Rupee cost averaging – SIP offers the advantage of rupee cost averaging to the investor. Essentially since a fixed sum of money is invested at regular intervals (say monthly), the investor gets more scheme units when the market is low and fewer units when the market is high, thereby averaging the buy price for the investor over time.
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Disciplined approach – SIPs help investors adopt a disciplined approach to investing. By investing a fixed amount of money at regular intervals, investors are less likely to get swayed by market fluctuations and impulsive investment decisions.
Avoid emotional biases – While emotional bias may cloud an investor’s decisions, especially on account of market volatility, starting an SIP enables you to invest at regular intervals without letting any human biases affect your decisions.
Apart from investing in equity SIPs, optimally managing your asset allocation can help you tackle market volatility effectively. Allocating your investable corpus across asset classes like equity, debt and gold, which have limited co-relation to each other with respect to performance, based on your goals and risk appetite is one of the best ways to tide over market volatility.
Further, periodically assessing your portfolio, optimally investing across the market cap mix (large, mid, small-cap funds) and most importantly selecting the right funds are key to achieving your financial goals.
Selection of an appropriate mutual fund scheme is a critical part of an investor’s successful wealth creation journey. While investors do look at historical returns while selecting funds, a better metric for assessing performance of a mutual fund scheme is “rolling returns”. Rolling returns are average annualised returns over a series of consecutive time periods. For example, to compute five-year rolling return for an equity mutual fund over a 10-year period, one would calculate the returns for the first five years of the investment, then move the window forward by one year and calculate the returns for the next 5 years and repeat the process until one has calculated the returns for all possible five-year intervals within the 10-year investment period and then average all these returns.
Rolling return essentially indicates the degree of volatility or consistency in a fund’s performance and is a much better indicator of fund consistency as against point to point returns.
If we undertake a rolling return analysis of Nifty 50, one of the key learnings is that while markets may have been volatile in the short term, they have consistently delivered returns over long periods of time. Hence, staying invested for longer periods in equities not only helps in creating wealth but also reduces the risk of negative return and volatility.
By adopting a long-term approach and staying disciplined to one’s own asset allocation and investment strategy, investors can effectively navigate market volatility and achieve their financial goals.
(The writer heads wealth management, capital markets and NRI business at Bank of Baroda)