A fall in the market and negative returns in a mutual fund portfolio can often make investors feel worried about their investments. But for those investing through a Systematic Investment Plan (SIP), a market decline can also create an opportunity to accumulate more units with the same fixed monthly investment.
For example, if you invest Rs 25,000 every month through an SIP, the number of units you receive changes according to the fund's Net Asset Value (NAV). A lower NAV means more units for the same Rs 25,000, while a higher NAV means fewer units.
How Rs 25,000 Buys More Units During A Market Fall
Suppose a fund's NAV is Rs 100 when the first SIP instalment is invested. At that price, Rs 25,000 buys 250 units. If the NAV subsequently falls to Rs 80, the same amount can buy 312.50 units. If it declines further to Rs 65, the Rs 25,000 instalment can purchase around 384.62 units. In other words, the same monthly investment buys around 50% more units at an NAV of Rs 65 than it did at Rs 100.
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The Role Of Rupee Cost Averaging
This is where rupee cost averaging comes into play. Since an SIP invests a fixed amount at regular intervals, investors automatically buy more units when prices or NAVs are lower and fewer units when they are higher.
Since a fixed amount is invested at regular intervals, an SIP continues across both rising and falling market conditions without requiring investors to predict the right time for their entry. Over time, this can help average out the cost at which mutual fund units are purchased.
The basic calculation is simple: the SIP amount is divided by the NAV to determine the number of units purchased. As a result, a falling NAV increases the number of units that can be bought with the same Rs 25,000 instalment.
What Happens If The Market Recovers?
During a market fall, a regular SIP can buy more units because the NAV is lower. If the market recovers later and the NAV rises, the units purchased at lower prices may increase in value. However, returns are not guaranteed, as mutual fund investments are subject to market risks and prices may not always recover. Rupee cost averaging can help spread investments across different market levels, but it cannot prevent losses or guarantee profits.
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Should You Stop Your SIP When Markets Fall?
A market decline may lead some investors to consider pausing their SIPs. However, rupee cost averaging means that a fixed SIP amount can buy more units when the NAV is lower. Continuing a SIP can help investors stay consistent and invest across different market conditions instead of trying to predict the right time to enter or exit.
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