Why ‘SIP it’ is a better strategy than ‘buy low, sell high’ strategy

Markets always move up and down in the short term. Besides factors like economic conditions, political developments, policy announcements and a host of company specific factors, stock prices also fluctuate due to liquidity flows and sentiments. Most importantly, stock prices also react sharply to 'black swan' events or totally unexpected events. The emergence of the Covid-19 pandemic in 2019 is an example of this. While it is tempting to wait for opportunities to buy at the lowest levels and sell at higher price levels, American investor and fund manager, Peter Lynch quoted - the only problem with market timing is getting the timing right. We can never time the markets correctly on a consistent basis and it is likely to result in adverse consequences such as inadequate investment or unexpected losses.

Maintaining a long-term investment horizon is a better modus operandi. Rather than timing the market, it’s recommended that you allocate smaller amounts to invest at regular intervals for a long period. One way to do this is to start a Systematic Investment Plan (SIP) in a mutual fund scheme that is aligned with your investment objectives. A SIP is an investment strategy wherein an investor allocates a predetermined amount of money for investment in the market at regular intervals. The amount and time interval is flexible and can be set as per the investor’s requirements.

Here’s why regularly investing in the markets via SIPs is likely to be a better approach compared to trying to buy low and sell high:

Reduce risks through rupee cost averaging

When you invest regularly, you reap the benefits of rupee cost averaging. You could purchase more units when the fund's Net Asset Value (NAV) is low and lesser units when the NAV is high. The purchasing costs are averaged over the investment’s tenure. But in a buy low, sell high strategy, you make purchase / sale at a price that may or may not be the best.

Power of compounding

Saving a small sum of money regularly over the long term has an exponential impact. When you remain invested for the long term, not only does the invested amount earn returns, but the returns also earn returns. This could lead to a significant increase in the investment value. The best way to leverage the power of compounding on SIPs is to start investing early, make disciplined contributions and not get swayed by market movements or emotions. It could be difficult to achieve similar growth consistently in a buy low, sell high strategy as in most cases time, as a factor, may not work for you.

No hassles or stress

Once you set up an automated SIP strategy, your investment will continue and you won’t have to lose sleep over market movements. You won’t have to keep tracking the status of your investment. Your mental stress will be less as you need not worry about remembering to invest or take actions based on market news or friendly tips. In a buy low, sell high strategy, you have to constantly track the markets and evaluate risks. You could end up making decisions for the short term. Moreover, the various stages of the market cycle may lead to emotions such as fear, greed or excitement, driving irrational investment decisions that could hurt your financial wellbeing.

A SIP is a disciplined and efficient way to invest in the equity market. It helps you by capturing the market average, eliminating the need to time the market and empowering you to achieve your financial goals.

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.