SIP
What happens when you start your equity SIP and the market crashes?
Starting a systematic investment plan (SIP) in equity funds is a smart way to build wealth over the long term. For an Indian audience, however, market volatility and the possibility of a crash can be a cause for concern, especially for new investors. If you have recently initiated an equity SIP and find yourself facing a market crash, it's vital to understand the implications and how to respond.
What is a market crash?
A market crash is a sudden, sharp decline in stock prices across a significant portion of the stock market. It can be driven by several factors— economic downturns, geopolitical events, or even pandemics. Crashes are marked by investor panic and widespread selling, causing a cascade effect of even lower prices.
SIPs and rupee cost averaging
SIPs are a blessing in disguise during market downturns. The principle of rupee cost averaging underpins an SIP investment plan. When you invest through an SIP, you put in a fixed amount of money at regular intervals.
Since markets fluctuate, during a crash, you automatically buy more units of your equity fund as their prices are lower. When the market eventually recovers, the increased number of accumulated units results in bigger gains.
The long-term advantage
Market crashes, while nerve-wracking, are generally temporary setbacks in the grand scheme of long-term investing. History has shown that the stock market has always tended to rebound after significant crashes.
If you have a substantial investment horizon, say 10 years or more, then such dips in the market shouldn't make you overly anxious. SIPs essentially allow you to capitalise on a market crash without trying to time the market precisely.
What should you do during a market crash?
Don't panic: Panic selling is almost always a terrible idea. When you sell amidst a crash, you lock in your losses and forfeit the potential for the market to bounce back.
Stay the course: If your financial goals remain unchanged, continue your SIP as planned. This is precisely how you make the most of rupee cost averaging.
Consider increasing investments: If you have extra funds available, consider increasing your SIP amount. This would allow you to 'buy the dip' and maximise your gains potential when the market eventually recovers.
Review your risk tolerance: Market crashes are a good time to reconsider your risk tolerance. If the volatility makes you deeply uncomfortable, it might be worthwhile to reevaluate your asset allocation and shift a portion of your investments to less volatile options, like debt funds.
Important considerations
Market timing: Do not stop your SIP in an attempt to time the market. No one can reliably predict when the market will bottom out or begin its recovery.
Financial goals: Always keep your financial goals in clear focus. These goals should dictate your investment decisions, not short-term market movements.
Professional advice: If you are unsure about how to navigate a market crash, seeking advice from a qualified financial advisor could give you additional confidence about your investment choices.
Conclusion
Market crashes are part and parcel of investing in equities. Though witnessing your portfolio value drop can be unnerving, the key is to maintain a long-term perspective. Equity SIPs are designed to weather such storms and emerge stronger as markets pick up. Staying committed to your SIP during market crashes is crucial in attaining your investment objectives.
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