Volatility and SIPs

26 09 2017

Financial advisors advice retail investors to enter stock markets through Systematic Investment Plans , SIPs in short. There are two major advantages of SIPs over lumpsum investment, namely, disciplined regular saving ( Franklin advertises it as a good EMI 🙂) and Rupee Cost Averaging.

Rupee Cost Averaging, means you take advantage of the ups and downs of the stock market by buying more units when the markets are low and fewer number of units when the markets are high, thus keeping the average costs,a tad lower, than if you bought the same number of units every month.

SIPs work better than lumpsum when volatility is high. In a rising market, lumpsum investment of the same amount will give higher returns.

In 2017, volatilty has been relatively very low. The number of days when the markets have moved 1 % down is a lot lesser than previous years.

volatility

Would SIPs of all the Indian retail investors, be the reason why the volatility is low ? As per the AMFI web-site, SIPs are growing rapidly, in August 2017 the SIPs accounted for Rs 5206 crore as opposed to Rs 3497 crore in August last year. So there is  steady continuous buying by Indian institutional investors.

Individually, each investor wanted to benefit from the volatility through SIPs, but collectively, SIPs of all the investors have brought the volatility down. The very reason for entering into an SIP now is questionable !

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