What happens when the market falls midway while you have invested for a longer term?

Mutual Fund investors with long-term investments through SIPs constantly worry about market falls during this period. SIPs are well-designed to overcome some of the Mutual Fund risks like market timing and volatility.

You can beat market volatility through rupee-cost averaging, by investing regularly in Mutual Funds through SIPs. Here you buy more units when NAV is low and vice versa. The cost per unit is averaged out over the long run if NAVs move both ways. For example, if you invest INR 1,000/- per month, you get 100 units if the NAV is INR 10 and 200 units if NAV drops to INR 5. Over longertime period, the average price per unit will fall if markets move in both directions thus helping to lower volatility of returns as well.

If you invest in lump sum, number of units would remain the same during the entire holding period, but their value would go down with falling NAV during market downturns. If you hold your lumpsum investment in an equity fund for long (say over 7-8years), the occasional blips shouldn’t impact your returns as markets usually move up over the long-term. You might end up with a far higher NAV than what you started with.