Equity markets tend to often fluctuate between high (overvalued) and low (undervalued) levels. The basic objective is to buy when levels are low and sell when they are high. It is relatively difficult to sustain this habit consistently.
Considering such a scenario, a systematic investment plan (SIP) has been considered a transformative tool for building a healthy wealth corpus in the long run and a preferred mode of savings for retail investors.
If numbers are anything to by then, more than Rs 17,500 crore worth of SIPs were processed in December 2023. There are various reasons why a SIP mode for investing in mutual funds could be an effective tool for wealth creation; these include:
- Captures the average despite the equity markets experiencing volatility
- Initiates a long-term approach to thinking
- Frees an investor from the cycle of greed and fear, helping them to manage their emotions effectively
- This leads to higher investing discipline with a lesser impact on various market events
After starting a single SIP, what is the next move? While keeping the potential benefits of SIP in mind, the ideal way is to not stop at just one SIP.
Here are the reasons why:
- Wealth creation and preservation is a life-long journey, and it requires more than a single SIP
- Adopting a portfolio approach to investing can reduce asset, company, and sector-specific risks and is likely to result in a better investment experience
- If an investor has a single SIP running for a long time, their income levels and future aspirations have likely increased since they started SIP. This is a situation warranting the addition of a SIP
An investor can opt to diversify by allocating across:
- Different asset classes (hybrid funds)
- Large-, mid-and small-cap segments
- Different sectors or themes
- Different styles (value or growth)
- Different fund management styles
By adding a SIP, an investor’s portfolio is likely to be better diversified with a balanced exposure to all asset classes or market capitalisation (m-cap) segments.
This way, an investor’s financial situation and preferences may differ from another investor’s. Considering this factor, it is prudent to consult a professional financial advisor before making any investments.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.