look news india
New Delhi/Lucknow: Whenever there is a big fall in the stock market and Sensex or Nifty dive into the red, the most restlessness is seen among new and retail investors. Many investors get scared after seeing their mutual fund portfolio incurring losses and take the wrong decision of closing their ongoing Systematic Investment Plan i.e. SIP or withdrawing money. To remove this misconception of investors and make them understand the correct mathematics of market fluctuations, the Association of Mutual Funds in India (AMFI) has clarified the formula of ‘Rupee Cost Averaging’ in very simple words. According to market experts and AMFI, the biggest magic of SIP works when the market falls, because during the fall, investors get a golden opportunity to buy more units of mutual funds at lower prices.
Rupee Cost Averaging is a disciplined investment strategy in which you invest a fixed amount on a fixed date every month, regardless of whether the market is bullish or bearish. Since the price of a mutual fund is determined by its Net Asset Value (NAV), when the market goes up, the NAV becomes costlier and fewer units are bought for your fixed amount. On the contrary, when the stock market falls, the NAV of mutual funds also becomes cheaper. In such a situation, your same monthly SIP amount gets you more units than before. By this process your average cost of total units purchased automatically reduces and in future when the market recovers and goes up again, the increased number of units increases your total profit manifold.
It is very easy to understand this with a practical example. Suppose you do SIP of Rs 10,000 every month. In the first month, if the market is bullish and the NAV of your fund is Rs 100, then for your Rs 10,000 you will be allotted 100 units. In the second month the market declines and NAV falls to Rs 80; This time you will get 125 units for the same Rs 10,000. In the third month, the market slips further and the NAV comes to Rs 50, so now you will get full 200 units on an investment of Rs 10,000. In this way, in three months you invested a total of Rs 30,000 and you accumulated a total of 425 units, the average purchase price (Average NAV) of which came down to only Rs 70.58 per unit. Now, if in the fourth month the market recovers and returns to its initial level i.e. NAV of Rs 100, then the total value of your 425 units will be Rs 42,500 – that is, you will have made a net profit of Rs 12,500 directly without the market going to a new peak.
It has often been seen that investors invest money excitedly at market peak and stop SIP out of fear when the market becomes cheap. According to financial advisors, this is completely contrary to the basic principle of investment i.e. ‘Buy Low, Sell High’. If you stop your SIPs during downturns, you lose the most important opportunity to accumulate more units at cheaper NAVs, keeping the average cost of your portfolio high and limiting returns during recovery times.
In the last few years, there has been a historic surge in the number of people investing in mutual fund SIPs from cities like Lucknow, Kanpur, Varanasi, Prayagraj, Gorakhpur and Agra in Uttar Pradesh. Due to AMFI’s ‘Mutual Fund Sahi Hai’ campaign, now even investors in small towns have started understanding that a temporary decline in the market is not a threat, but is like a ‘discount sale’ for long-term wealth creation. If your financial goal is 7 to 15 years away, continue your SIPs through market downturns and if possible make the most of rupee cost averaging by increasing your investments through ‘Top-up SIPs’.