capital markets are inherently volatile. through various events such as the 2001 dotcom bubble and the 2008 financial crisis, we have seen stock markets around the globe plunge and erode billions of dollars' worth of investor wealth in a matter of days. the recent covid-19-led market meltdown is another such 'black swan' event, in which the market dipped by over 30% in just a few days.
for investors, naturally, events like these represent significant risks and worries. on the one hand, market risks exist and are a part of the landscape of investing. on the other hand, the market has generated tremendous returns for long-term investors over long investment horizons.
so how should retail investors, with limited ability to 'time' markets or perform detailed technical analyses of stock markets, participate in the market and tide over volatile periods?
systematic investment plans or sips, a common offering from mutual funds, can be one tool to combat bad market conditions.
now, as the name suggests, an sip should be systematic. in other words, investors should not try to 'time' an sip, which refers to watching the market closely and make investments at profitable or advantageous prices. when you opt for an sip, you're not timing the market: instead, you're investing a fixed amount of money at a predefined frequency, such as every month or week.
a mistake that investors tend to make in periods of great market volatility is panicking and stopping investments. in doing so, they may miss out on buying mutual funds or equities at lower price points. say you have a specific goal like buying a property or a car, and use an sip calculator to decide on the investment amount. irrespective of short-term market fluctuations, investors can derive decent returns over a longer time horizon like 5-10 years or more.
to give one example, over the past 20 years, we have seen three major crises, the dot-com bubble burst, the great financial crisis, and the covid-19 crisis, apart from geopolitical impacts like the 9/11 attack and the 26/11 mumbai attacks, to name a few events when the market took a sharp hit. despite that, nifty grew ten times during the period. an sip return calculator can help you see how much wealth you can create through sips based on your risk-return appetite and investment horizon.
here's how sips help investors even in choppy markets.
to sum up, market fluctuations may not be an enemy in the quest for long-term wealth. the sip is the tool that can help you benefit from market fluctuations while reducing risks. thus, instead of getting carried away by the ups and downs of the markets, continuing at a steady pace will help you reap the long-term benefits of capital markets.