We all know that stock market is a rewarding tool if you take risk, One should invest in stock market as per their risk-appetite. Those who can’t bear risk can choose “Mutual Funds”- a safer bet when compared to the stock market.
The reason why mutual funds are relatively safer than stock market is- “You invests small, small amounts in tranches(sip)which averages out your investment cost in the long-run. While in stock market all your investment cost will be eroded if any unfortunate geo-political tension arises. It may take time to bounce back, but in mutual funds you buy units both in bull and bear market which works out- “Rupee Cost Averaging”
What investors generally ignore is- “They get more units when the market is in bear phase and lesser units in bull market”. But due to uncontrollable emotions investors redeem their investments in hurry!
What investors should note that- “Stock Market has faced many Geo-Political Tensions till now where this is not the first one and the last one to face such financial and socio-economic crises” You might lost your hard-earned money in stock market during financial crises, but if you stayed patiently for long-term in mutual funds you will never loose money.Though it’s strange to hear, it’s fact!
As per digital data available on the net Stock Market has faced many crises like-
- Harshad Mehta Scam- 1992
- Dot Com Bubble -2001
- Global Financial Crises-2008
- Covid-19 Pandemic-2020
- Russia-Ukraine Tensions-2022
When we observed the past data, stock market retained to all-time highs even though it passes through all these Geo-Political tensions. What investors should learn from this is – stayed invested for long-term and not to frightened on temporary fluctuations.
This might not be possible in direct equity(shares)as stock prices may collapse if any bad news comes on that company stock. But in mutual funds, fund manager has the flexibility to shuffle shares based on the market movements which helps you to gain huge returns if you stayed invested for the long-term!
Still not convinced! Let’s take an real life example on how mutual funds created wealth despite many global crises-
- If you have started an sip of 10,000 rupees in an index fund since December 2004, let’s see how you would create wealth-
- On seeing Global Financial crises in 2008, if the investor gets frightened and redeemed his investments by ceasing sip- His investment value would be 2.80 Lakhs out of 3.80 Lakhs investment(Lost 1 Lakh by redeeming his investments in hurry)
- If the investor ceased sip but not redeemed his investments till date his investment value would be 14.45 Lakhs (out of investment cost 3.80 Lakhs)
- If the investor continues sip amid covid pandemic his investment value would be 34.20 Lakhs out of his investment 19.70 Lakhs
This proves the “magic of the sip” if you stayed invested for long-term without worrying on the market volatility. Do remember sips works better in volatile times. So stay invested for long-term. Remember- If your investment journey is hundred miles away, don’t get frightened on the short-term volatility. Stock market has faced many such crises and it will repeat in the future too, so as an investor treat volatility as a friend and stay invested for long-term through sip mode in mutual funds.