FALLING markets have turned investors jittery. Even those with systematic investment plans (SIPs) are stopping fresh investments and even redeeming units. Investors are confused over whether to make the best of an opportunity or to stop throwing good money after bad. According one of Mumbai-based certified financial planner, “Investment returns are a function of price and this could be the best price you could get. Any SIP works best when markets are going lower. So, if you have a good scheme, continue with the SIP.”
Although investors are worried about further losses, liquidating units is an absolutely wrong strategy in such situations. What you are essentially doing is buying low now (so you get more units and hence lower average cost). Your returns will be substantially higher when the market turns around. The periods that we are witnessing now are the best to just buy low as these are prices that one cannot expect everyday.
So, what would happen if you hold or quit your SIP? Let’s understand with an example. Let us assume you have been doing a SIP of Rs 2,000 per month through October 2007 to September 2008. The cost incurred by you would be Rs 24,000. But the market value (what you would get if you redeem the units) of these investments would be roughly Rs 15,000 as of now. That simply means you would lose Rs 9,000 or more if you were to divest immediately.
“If you stop the SIP but not divest, the holdings would be worth Rs 18,000 after a year (with 20% growth from here). Instead, if you continue investing through another one year, at the end of one year from now, the investments would be Rs 48,000 at cost and Rs 50,000 at market value. Hence, instead of a loss of Rs 6,000, you would be breaking even,” So, if you have decided to contribute Rs 1,000 for a goal on a monthly basis, and now that you can get more units for the same cost, why would you stop it or rather why should you stop it? Markets could test further lows in the coming days or weeks. However, one thing that we must do is to continue to buy during such tough times because the purchases done in such times deliver the best returns. In fact, this is the time to increase investments. If you are a first time buyer, you need to know your goals, time horizon, how much returns do you need and your risk profile. It’s far more important to know yourself first than to know the investment. Once you know yourself, then you should look out for schemes with a good track record and also the potential to do well. You should not look for a scheme with the highest return, but with a scheme which is consistent in its performance. Also, look at the fund management team and its stability.
Although investors are worried about further losses, liquidating units is an absolutely wrong strategy in such situations. What you are essentially doing is buying low now (so you get more units and hence lower average cost). Your returns will be substantially higher when the market turns around. The periods that we are witnessing now are the best to just buy low as these are prices that one cannot expect everyday.
So, what would happen if you hold or quit your SIP? Let’s understand with an example. Let us assume you have been doing a SIP of Rs 2,000 per month through October 2007 to September 2008. The cost incurred by you would be Rs 24,000. But the market value (what you would get if you redeem the units) of these investments would be roughly Rs 15,000 as of now. That simply means you would lose Rs 9,000 or more if you were to divest immediately.
“If you stop the SIP but not divest, the holdings would be worth Rs 18,000 after a year (with 20% growth from here). Instead, if you continue investing through another one year, at the end of one year from now, the investments would be Rs 48,000 at cost and Rs 50,000 at market value. Hence, instead of a loss of Rs 6,000, you would be breaking even,” So, if you have decided to contribute Rs 1,000 for a goal on a monthly basis, and now that you can get more units for the same cost, why would you stop it or rather why should you stop it? Markets could test further lows in the coming days or weeks. However, one thing that we must do is to continue to buy during such tough times because the purchases done in such times deliver the best returns. In fact, this is the time to increase investments. If you are a first time buyer, you need to know your goals, time horizon, how much returns do you need and your risk profile. It’s far more important to know yourself first than to know the investment. Once you know yourself, then you should look out for schemes with a good track record and also the potential to do well. You should not look for a scheme with the highest return, but with a scheme which is consistent in its performance. Also, look at the fund management team and its stability.
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