Unlike a lump sum investment, SIP spreads your investment in small amounts to be paid overtime
Sensex and Nifty have been on a stellar run since last week, and that continued on Monday. The Nifty hit its lifetime high Monday afternoon when it touched 15,555.75 points. Analysts say they expect the indices to continue to show good performances in the short term and maintain their positions. Since Nifty began its incredible run, some investors have been cautious about any correction in the market in the coming days. Those who have invested in SIPs too are a bit anxious on whether they should continue with their investment or book profits now to reduce their exposure.
Most SIP investors or those who take the SIP route to mutual fund investments are first-time investors and lack in-depth understanding of how the market functions. So let’s first understand what a SIP is and how it functions before making any decision.
What is a SIP?
A Systematic Investment Plan (SIP) is a popular way of investing in mutual funds for first-time investors who want to lower their risk. It involves allocating a small pre-determined amount for investment in the market at regular intervals (usually every month). Unlike a lump sum investment, SIP spreads your investment in small amounts to be paid overtime. Investing via a SIP helps you in instiling a sense of financial discipline.
How does it function?
Every time you invest in a mutual fund via a SIP, you purchase a certain number of fund units. You can actually benefit from both bullish and bearish trends. When the market is down, purchase more fund units. When it is up, purchase fewer units. Over time, the cost of purchase averages out to the lower side. This is called rupee cost averaging.
Strategy ahead
Since the market is on a bull run now, most first-time investors are wary about a possible correction in the near future. For SIP investors, market fluctuation should be a minor factor as theirs is a long-term investment. The SIP is doing its job irrespective of the short-term gains or possible losses. There’s no need to change your market strategy because of these short-term fluctuations.
Consider this: Nifty is above the 15,000 mark now and may come down in a few months. But the index is almost certain to be at a much higher level in five years from now. So the smart move right now is to keep your SIP investment going on, say experts.