Staggered investment options to counter equity volatility

First, it was the pandemic-induced lockdown subsequently leading to the supply chain issues, then the Ukraine conflict, the inflationary trends and now the recessionary fears due to steeper tightening. If you were to observe, there’s always a macro event one or the other at different timelines. Across the asset classes, the most transparent and profitable is equity. And the performance of equity over long periods is stellar despite the volatility caused by these macro events.

At every of these junctures, the market ie, the collective psychosis of the market participants swings between desperation and euphoria which results in the volatility. So, for equity volatility is not a symptom but a feature and one have to counter it to make money. The best way to counter is to spend more time in the market than to time it. The other way is to nullify this by averaging the cost of acquisition ie, by investing in a staggered manner. There’re enough tools to achieve this and foremost are Systematic Investment Plan (SIP) and Systematic Transfer Plan (STP).

SIP allows one to invest a fixed amount for a fixed tenure at a fixed interval ie, daily, weekly, monthly, etc. It also allows one to invest amounts as small as Rs 500 monthly making it a very convenient way to start investment even for a small investor. It thus breaks down the investment goals into smaller portions leading to potential long term wealth creation.

Despite knowing the capacity of equity to generate long term wealth, it’s difficult to remain invested especially during turbulent times. SIP addresses this concern of regularity and provides a disciplined approach to investing. While it ensures commitment, it plays a critical role of averaging the cost as the money is invested across multiple levels of the market. Also, as the future income is diverted to investing, this also enhances the budgeting in an individual’s personal finances.

Now, there are many iterations to this simple and humble SIP. The flexi-SIP allows one to commit higher than the constant money during market falls and lower amounts during peak markets. Though this is technically superior, one needs to be aware of the irregular amounts that are contributed and so must be budgeted accordingly.

Another practical and useful tweak in the regular SIP is the top-up option. This feature allows one to increase the contribution of the SIP amount at a pre-defined percentage at a defined interval. For instance, if one were to opt for a SIP of Rs 10,000 per month with a top-up of 5 per cent every year then the SIP amount would be Rs 10,500 in the next year.

How a STP differs from SIP is that it tackles the capital that is readily available to be invested unlike a SIP where the flows are of future. When there is a lumpsum amount available and one is not sure of the current market condition, could opt to stagger the exposure to equity by opting a STP. In this, the available fund is placed in an ultra-short or a liquid fund and then moved on a regular interval to one or more desired equity funds.

For instance, if one were to have a corpus of Rs 1 lakh but a lumpsum exposure to equity is not suitable to their risk appetite then they could use STP to invest in equity in a staggered manner. Through STP, one could automate the amount of installment to be moved from the debt fund to equity at an interval of choice ie, daily, weekly, monthly, etc. and for a fixed number of period or installments. This thus achieves the rupee cost averaging of an equity investment.

Like in SIPs, there are some innovations in STP also. A flexi STP is an option where a range of amount is defined, for instance, in a regular STP Rs 1,000 is used for a weekly transfer from debt to equity, in the flexi option, Rs 500 to Rs 1,500 could be defined which allows the investment to move to the higher band of the range when the market is at an attractive or lower valuation while to the lower band when the market is peaking or at higher valuation. This allows for higher efficiency of the contributions as more units could be added during lower market levels and vice versa.

Just employing these tools, though, wouldn’t guarantee success but certainly would offset some of the risk associated with investing in equities.

(The author is a co-founder of “Wealocity”, a wealth management firm and could be reached at [email protected])