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Swinging stock markets? Don't give up on your SIP

Last updated on: July 2, 2012 07:20 IST

Swinging stock markets? Don't give up on your SIP

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Morningstar.in

Are the market's swings making you rethink your monthly investment allocation? Staying put is the wise choice.

The stock market has had a volatile few years with the Sensex moving in excess of 40 per cent in five out of the last seven years either ways. Last year, the Sensex was down over 20 per cent while this year too, the ride has been less than smooth.

While volatility while investing in stocks is par for the course, the wild swings can take a toll when it comes to taking investment decisions.

If you invest in mutual funds via systematic investment plans (SIPs) and if the fund has red on its record sheet, you may have considered quitting. You shouldn't, here's why.

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Tags: SIP

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Swinging stock markets? Don't give up on your SIP

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Buy stocks cheap

The strategy of investing via SIPs pays off because you invest across the course of a stock-market cycle.

Thus, if your earlier SIP installment went towards buying stocks when they were expensive, now will be the time to average the cost of your purchases and buy equities at a discounted price to help achieve long-term capital appreciation.



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Swinging stock markets? Don't give up on your SIP

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Eliminate timing risk

All investors would have, in hindsight, loved to invest in the stock market when the Sensex was at around 8,000 levels at the bottom of the 2008 crash. But few did.

The truth is: trying to time the stock market is largely a futile exercise and hardly anyone can claim to have done it successfully and repeatedly.

By investing on a regular, monthly basis, SIPs will help you buy stocks right at the bottom of the market, wherever it may be.


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Swinging stock markets? Don't give up on your SIP

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Add discipline to investing

The biggest advantage of SIPs is it inculcates investing discipline by getting you to invest regularly. And nothing tests your discipline like seeing losses on your portfolio scorecard.

So even as one finds it difficult to put to use Warren Buffett's famous advice to be greedy when others are fearful, investing in SIPs will help you go against popular herd behaviour in which average retail investors rush in when stocks are making new highs and sell out when there is despair on the street.


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Caveat: SIPs no substitute for research

Finally, it is worth remembering that investing via SIPs is not the only cornerstone to building long-term wealth and the strategy may not reward you if you are investing in an inherently flawed fund.

SIPs will pay off, providing you are investing in the right mutual fund, having done your research about its ability to manage your money, and whether its asset allocation, investing approach and risk profile are in line with your expectations, risk appetite and investment horizon.


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