The impact of market fluctuations on SIP investments
Market fluctuations are a common occurrence when investing in equities. In fact, it is the nature of the stock market to fluctuate, and this enables investors to earn from it. The same principle applies to Systematic Investment Plan (SIP) investments as well. However, the impact of market fluctuations on SIP investments is often a cause for concern among investors. It is important to understand that while market fluctuations can lead to short-term losses, they can also lead to long-term gains. Read on to find out more about how market fluctuations affect SIPs.
What are systematic investment plans?
A Systematic Investment Plan (SIP) is a popular investment option provided by mutual fund companies. It is a disciplined and consistent investment approach that allows investors to invest small amounts of money at regular intervals (weekly, monthly, quarterly, etc.) into a mutual fund scheme of their choice. The investment amount can be as low as Rs. 100 per month, making it an appealing investment option for investors with limited financial resources.
SIP investments offer investors several advantages, including the power of compounding, rupee cost averaging, and disciplined investing. By investing on a regular basis, investors can benefit from the power of compounding, which allows their investments to grow over time. Furthermore, the rupee cost-averaging feature of SIPs allows investors to buy more units when the markets are low and fewer units when the markets are high.
What are market fluctuations?
The changes in the prices of securities traded on stock exchanges are referred to as market fluctuations. Changes in the economic, political, or business environment, global events, geopolitical tensions, interest rates, corporate earnings, and investor sentiment, among other things, can cause these changes.
Market fluctuations can be either positive or negative, and they can have a significant impact on the portfolios of investors. Positive fluctuations, also known as bull markets, are marked by rising stock prices, whereas negative fluctuations, also known as bear markets, are marked by falling stock prices.
It is critical to understand that market fluctuations are a normal occurrence and part of the stock market’s natural cycle. Investors should focus on the long term and avoid making investment decisions based on short-term market fluctuations.
Five ways SIPs are impacted by market fluctuations
Impact on investment amount: The investment amount in SIPs remains fixed, but the number of units purchased varies depending on the market price of the mutual fund. When the market price is high, fewer units are purchased, and when the market price is low, more units are purchased.
Impact on investment returns: The returns generated by SIPs are directly impacted by market fluctuations. In a falling market, the returns generated by SIPs may be lower, while in a rising market, the returns may be higher.
Impact on portfolio value: The market fluctuations impact the overall portfolio value of the investor. In a bear market, the value of the portfolio may decrease, while in a bull market, the value may increase.
Impact on investment horizon: The market fluctuations may impact the investment horizon of the investor. In a bear market, the investor may be tempted to exit the investment early, while in a bull market, the investor may be tempted to extend the investment horizon.
Impact on risk appetite: The market fluctuations may impact the risk appetite of the investor. In a bear market, investors may become risk-averse, while in a bull market, investors may become overconfident and take excessive risks.
Market fluctuations are an integral part of investing in equities, and SIP investments are no exception. While market fluctuations can cause short-term losses, they can also lead to long-term gains for investors who remain patient and disciplined.