Starting SIP in Equity Funds when equity markets have rallied
Systematic Investment Plan (SIP) allows investors to invest in mutual funds periodically. Once the SIP mandate has been submitted, the amount deducted from the bank account on the specified date is invested into different mutual fund schemes as per the details in SIP.
The investments continue to be made across market ups and downs. When the markets are going lower, a higher number of units are allotted due to lower NAV (Net Asset Value). This helps the investors to average out their cost of investments and benefit from portfolio appreciation once the markets rebound.
In contrast, when the markets are rising, the number of mutual fund units allotted is lower. As such, it is obvious for the investors to ponder if it is the right strategy to continue a SIP or start a new one when the markets are rallying.
The monthly SIP inflows data released by the Association of Mutual Funds in India reflects that the investors portray a relatively mature approach towards investing. Even while the markets have remained volatile and further made a sharp rebound from the March lows, the SIP inflows could primarily sustain. SIP inflows in August 2020 across the mutual fund industry were Rs. 7,792 crores, around 10% lower than the all-time high inflows of Rs. 8,641 crores seen in March 2020.
There has also been an increase in the number of new SIPs registered over the period. In August 2020 itself, 11.01 lakh new SIPs were registered by the investors, aggregating to 46.72 lakh new SIPs during the first five months of the current financial year
Source: Association of Mutual Funds in India – AMFI.
Here are four reasons for the investors to start a SIP in equity funds when the markets are rallying:
Rupee Cost Averaging
While the markets are rallying, the future market movement in the short-term may not be predictable. While one may consider it a better strategy to make lump sum investments and gain from the market uptrend, the markets may reverse the trend and reflect a correction. A SIP enables the investors to make the most of such corrections and average the cost of investments.
One may also think that the markets may be rallying now, but may soon correct to fair valuations. As such, it might be considered better to wait for the right levels to invest. This procrastination may lead to deferring the investment plans, which may not be desirable for the financial goals.
SIP allows to rein over the investors' emotional bias and make consistent savings in the equity markets. A SIP is meant to run across the market cycles and not only through the bear markets. It helps the investors to accumulate a healthy amount over the long term, which would also grow over time.
Participating in future market rallies
Saving regularly through SIPs helps the investors to make regular investments across market movements. This comes in handy when the markets rally further, as the investment portfolio appreciates generating better returns for the investors.
Fear of Missing Out
FOMO is a commonly-experienced trend when the markets are rallying. Investors feel like left out in the market rallies and seek to commit further amounts generally in a lump sum to gain from the market rallies. However, the markets may not be so kind to the investors. As such, it is always a prudent investment strategy to invest in equity markets through SIP in equity-oriented mutual funds, instead of investing in a lump sum.
With SIPs acting as an enabler for regular investments in mutual funds, the investors may consider starting a SIP to continue moving towards their financial goals irrespective of market movements.