Enter equity markets through Systematic Investment Plans into Mutual Funds

Equity markets saw a steep correction in September and it is continuing this month as well. Majority of the stocks and sectors stumbled with fears of rupee depreciation against the dollar, rising crude prices, current account deficit and hardening interest rates. Investors are worried. But new investors participating in equity mutual funds through the Systematic Investment Plan are least worried. And the reason is they are only buyers. They buy mutual fund units of equity funds every month. And this correction is best suited for them as they will be accumulating more units. It is proved that SIP investors make the best returns in long term mainly due to two features - Rupee Cost Averaging & Power of Compounding.

I advice investors to go for SIP for their long term financial goals. And generally it would be for minimum 10-15 years. So the first half of the duration is our buying period. We buy at various levels and it is good if markets are volatile. Due to market corrections, we accumulate more units each time when the price of the units is lower. Our purchase price gets averaged to the best possible extent. We may not make any profits in the initial few years. But we accumulate units for future profits. That's called Rupee Cost Averaging.

By this time, the compounding would have started. Markets don't stay low or high always. It moves like a ocean wave in the short term. But if you see the long term, its always a straight line trending upwards. When markets move up, all the units purchased at lower prices suddenly starts growing significantly. Every unit starts gaining phenomenal profits for you. The unit prices would grow 4 to 5 times of the purchase price over a period of time. That's called power of compounding.

Let's take an example of last 15 years. In this period, we witnessed steep market corrections as well as big market rallies. In 2004, when Vajpayee Government lost the elections, markets fell by 842 points. In 2008, from its lifetime high Sensex crashed by 61% in 1 year during the global financial crisis. It bounced back by 157% in 1.5 years from there. In 2010, sensex corrected 28%. And bounced back by 96% in 3 years. There were many such smaller ups and downs in the market. Now again, markets are correcting. The downside from here may or may not be limited. But this too shall pass and markets will bounce back.

In the same 15 year period, Mutual Funds SIPs have delivered more than 15% compounding returns per annum. 15,000 rupees invested every month has become more than 1 Crore when the total investment was just 27 lakhs (over a period of 15 years, not at once). That's 73 Lakhs profits contributed by the market. Your contribution was just 1/4th of the goal. This happened to only those investors who continued their SIPs inspite of big ups and downs. Those who stopped or exited during fearful times burnt their fingers. Those who continued, created wealth.

So, there's no good time or bad time for starting a SIP. But starting a SIP during a volatile period like now is definitely a good time. So rejoice and take a plunge into equity now. Start your SIP into mutual funds today. Have a financial goal, select right mix of mutual funds, keep investing every month, patiently digest volatility and start your journey towards wealth creation. Rest, leave it to SIPs.

Srivatsa Hebbar
Inverika Investment Solutions LLP

Decoding Demonetisation Impact On Key Asset Classes

Over the last one week, ‘Demonetisation’ has suddenly become the most used word in India. Everyone, right from day labourers to celebrities are not shying away from analysing the impact of this phenomenon as per their own understanding. Everyone has a say on the subject, which in itself, proves the widespread impact of this drive on the general public. 

Before moving ahead on the outcome of demonetisation exercise on various financial assets, it will be relevant to know what exactly is demonetisation. 

“Demonetisation is withdrawal of currency as an official mode of payment.”

Although demonetisation could disproportionately affect the various income groups of India in many ways, the recent one was mainly targeted at unaccounted cash holders. Also, the move was to disrupt fake currency circulation by terror groups. 

Let's take a brief look at the impact of demonetisation across key asset classes. 

1. Equity Market - Demonetisation could have eroded the optimism from equity markets on short-term, but it may not hurt equities over long-run as the market digests the uncertainty triggered by the move. However, some of the sectors are likely to underperform, given their dependency on the unorganised economy. Despite this, the move should not at all deter long-term equity investors, who might come across several buying opportunities in the coming days and months. 
2. Real Estate - Real estate sector, which is notoriously known for high-value cash transactions and involvement of black money in tier II and III cities, is certainly going to take a hit, following the Demonetisation move. This asset class might see a steep correction as many of the investors, who would have planned to reap profits by investing unaccounted cash, would withdraw from the system. However, projects undertaken in Metro cities are not likely to face the heat as this fragment has already shifted to the organized system long back.  The liquidity crunch might haunt the sector for a while, but transparency in the sector is apparent that will benefit legitimate investors in future.Over and above, expected drop in home loan rates following demonetisation is also seen positive for the sector. 
3. Debt Market - The return potential and attractiveness of debt market has only improved following the demonetisation move. Inflation is likely to ease, which will provide room for the Reserve Bank of India to cut policy rates, thereby, leading to higher bond prices. Under the present scenario, debt investors might benefit the most from several positive aspects that come into play for this asset class alongside rate cuts. 
4. Gold - The asset class made the most of the Demonetisation move and is likely to retain its glitter in the upcoming days. The sudden abandoning of high-denomination currency by the government has once again reinforced the public’s faith in the yellow metal. Gold will continue to be among the most preferred investments for Indians, who await more bold steps from the Government during its tenure. 

In a gist, the cessation of currency will have only little impact on digital-savvy investors and they can continue to move ahead with their planning as usual, unfazed by the recent chain of events. 

About The Author: Reenika Avasthi is associated with Inverika Investment Solutions LLP as a Content Writer and Financial Planner. She is a Certified Financial Planner and a freelance content writer in the field of personal finance. Her interest in writing and spreading investor awareness motivated her to start blogging.

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