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Ever since mutual fund investments have gained the customer's attention, SIP - Systematic Investment Planshavebeen widely talked about.A SIP boasts of several benefits such as rupee cost averaging, compounding, regular investments and more. But it is often belittled as a mere concept with little proof to it
But SIP is one tool that has established itself as a true blue competitor to market volatilities.
Equities as an asset class have never been known for steady growth because generally equities perform in spurts over a period of time. A classic example of this is, when markets were trading in a certain range from 2010 to 2013, a lot of investors who were invested in the equity market through SIPs were questioning their position and most of them withdrew or redeemed their SIP investments.
They believed they did the right thing by stopping their SIPs when the annualised return from such SIPs at the end of the 3 year period was low. But when the markets saw a recovery on moving out of that range in 2014, the return on the same SIPs were on the revival mode.
Take a look at this data
To understand exactly how SIPs proved their worth over time, have a close look at the example below.
As is apparent in the above example, in the period from Dec 2010 to August 2013, the markets were moving in a range an investors were making meagre returns even after holding the SIP for 3 years. The annualised return of a SIP benchmarked to S&P BSE Sensex during the period was 3.69% at the end of 3 years.
But if an investor had held on to his SIP throughout, within a year the same investments yielded an annualised return of 15.52%. Even if the market corrections in 2015 were factored in, the returns would still have been a modest 9.71% annualised.
The above mentioned example clearly illustrates the fact that patience pays handsome rewards.
By nature, equity markets are known for their long term wealth creationpotential and unpredictability in the short term. Investors must let their investments absorb the market movements over a period of time to average out the volatility and reap the actual benefits. Now this is exactly what a SIP does. The uncertainty of equity markets can be effectively exploited to accumulate and build exposure through SIPs so that the ups and downs of the market are captured.
Taking this lesson forward
We have witnessed significant volatility in the stock market in 2015 with S&P BSE Sensex declining more than 5% during the year. But 2016 is expected to be a year of domestic recovery although we may continue to see volatility in the global markets.
However, it is during such times that investors need to look beyond the noise and continue to maintain the discipline in investing. As the domestic market gains momentum and starts to reflect corporate earnings, such investors would get rewarded for their patience. The mantra for investing stays the same- start early, invest regularly and stay invested!
This article (including views expressed herein) solely provides general information about the markets and is not for solicitation of investments by L&T Investment Management Limited and/or L&T Mutual Fund. The information in this article should not be construed as providing investment advice and does not seek to address specific investment objectives, financial situations and particular needs of any specific person who may receive this information. The recipient of this article, therefore, should rely on his/her investigations and obtain professional advice (legal, tax and financial) before taking any investment decision, and should understand that statements made herein regarding future prospects may not be realised. . Neither this document nor the units of L&T Mutual Fund have been registered in any jurisdiction other than in India. The distribution of this document in certain jurisdictions may be restricted or totally prohibited and accordingly, persons who come into possession of this document are required to inform themselves about, and to observe, any such restrictions.Any performance information shown refers to the past should not be seen as an indication of future returns. The value of investments and any income from them can go down as well as up.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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