Is investing in equity mutual funds through a Systematic investment Plan (SIP) a better option than lump sum investments during the current market volatility?

At present, we are dealing with a market that corrects and corrections are bought into

Considering this, the above question is very important as we (investors) are investing to maximize returns and beat inflation.

Taking this into account, many investors (who understand & do not understand the market dynamics) – invest in the stock market through

• Mutual Fund(both active & passive) as an investment vehicle
• SIP(Systematic Investment Plan) for stocks and Mutual Funds

So, here an important differentiation comes of investing small amount monthly for many years to come or investing in bulk and letting the money stay for many years to come.

Which approach is better?

To understand this, we need to read a quote shared by the GURU of Warren Buffet

This quote highlights that guesstimating(guessing + estimating) is essential when we are not sure what will happen next and whether our investments will be able to generate returns.

We will not have to worry when

1. We invest in the stock or mutual fund below a value that will not be breached even when the market corrects. This value is called – Margin of Safety(MoS)
2. We estimate the right pricing for the Stock/Mutual Fund based on Intrinsic Value and buy accordingly

As normal investors, we might not have the luxury to act on Point 2 and we might never be able to have sufficient MoS for our investments in an expensive turbulent market.

So, what is the solution

→ Rupee Cost Averaging or Dollar Cost Averaging

In simple terms, invest in small amounts to capture market ‘Highs’ & ‘Lows’.

This is best done using the magic of SIP (Systematic Investment Plan)

Hope this helps you make a decision regarding your investments

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