Ashoka R, Founder & CEO, Siga Square Financial Services Pvt. Ltd
According to Benjamin Graham, the father of value investing, “Quotations fluctuate constantly, reacting often illogically to all sorts of temporary and even trivial influences.” Indeed, if there is one thing everyone can be sure of, it is the fact that equity markets are always volatile. And, it is almost impossible to predict where a market will move, or how. The underlying volatility of equity markets is a major reason why investors shy away from equity investments – there is no real guarantee as to how well your investment will perform, especially over the short term. Let us consider a very simple example. In July 2021, Ankita invested INR 2 lakhs lumpsum in different equity mutual funds, hoping to participate in the growth of the market. Over the first five months, that is, from July to December, her investments showed a return of about Rs. 20,000. She was jubilant about her decision and shared her success with her friends and family. Come February, and the entire scenario changed drastically!
Her returns fell sharply and the Rs. 20,000 profit turned into a loss of about Rs. 10,000, making Ankita panic and question her investment decision. While the market was bullish when she invested the money, it fell sharply in the beginning of 2022, owing to several international and domestic developments. She was so taken aback by the volte face that she almost ended up pulling out her money but then her financial advisor suggested that she use the underlying volatility to her advantage, instead of running away from it.
Optimising Investments Amid Volatility
The idea about investing into equities is because the asset class has the potential to deliver attractive returns if one is ready to be patient with one’s investment. In this journey, the returns delivered will help beat inflation and accumulate wealth. Now, the next step in this journey is knowing how to leverage volatility to your advantage.
One of the simplest ways of not being dissuaded by market volatility is to invest via the Systematic Investment Plan (SIP) route through which you invest in mutual funds on a regular basis. This helps you take advantage of compounding which plays out over the long term. But what will allow you to take advantage of market volatility is enhanced features such as Booster SIP. This is an offering by ICICI Prudential as a means to enable investors to make the most of market volatility.
Booster SIP
You can optimise your SIP investment by choosing Booster SIP as this instrument enables you to invest more in equity when the valuation is attractive and lower your investment when the units are more expensive. Booster SIPs allow you to invest a variable amount based on valuation, thus helping you make the most of the volatility. In Booster SIP, the SIP amount is deducted every month and is parked in a debt fund. Thereafter, basis the in-house equity valuation index, an amount which ranges anywhere from 0.1x to 10x of the SIP amount gets transferred to an equity fund of one’s choice.
In effect what occurs is that lower amounts are transferred when the valuation index indicates that market is expensive and higher amounts are invested when the market is attractive. While SIPs offer you the potential for rupee-cost averaging, with booster SIPs, you can benefit from both rupee-cost averaging and value averaging.
Based on back-tested data of five-year rolling returns for each month, fended from March 2010 to April 2022, we can see that booster SIPs in the Nifty50 index outperform normal SIPs by a compounded annual growth rate of 2.7%. This clearly shows the edge the feature can power your investments with.
To conclude, while investing for the long term, investors can power their investments with innovative feature like the Booster SIP. The true power of the feature will be visible over the years. So, it is important for investors to be patient with their investments and benefit from market volatility in a simple and disciplined manner. So, next of staying out from equity investments because of market volatility, leverage this feature to thrive during such times.
