“Individuals who cannot master their emotions are ill-suited to profit from the Investment process” – Benjamin Graham
Volatility is inherent to equities. But rest assured in the knowledge that participating in equity markets through SIP (Systematic Investment Plan) in diversified equity Mutual funds is the most recommended investment strategy for long term wealth creation. The recent fall in stock markets, falling currency, high oil prices and negative sentiment have tested the investor’s patience and the majority of investors have perceived scepticism about the effectiveness of SIP investments through Mutual Funds.
We always recommend SIP investments with the objective of meeting financial goals like children’s education, marriage, retirement and other goals which are typically long term i.e. more than 10 years, so that it allows the investor to invest through different market cycles and get the maximum advantage of Rupee cost averaging. It inculcates a habit of disciplined saving. The magic of SIP will not be understood if you are a new investor or even someone who has been investing for 3 to 4 years. Its magic can be understood if we understand the Power Of Compounding. Only when water our plants regularly will they grow into magnificent trees. Things don’t happen overnight – it takes years to grow into a tree. Also, it needs to be nurtured regularly to ensure it grows well and gives good fruit. Now apply the same logic to SIPs – to create a huge corpus, you have to regularly water it with SIPs and over the years, it will grow into the corpus you wished for. This process of growth is called Power of Compounding.
To understand the magic in real numbers, look at the table below. Let’s take an example that we save monthly Rs. 25,000/- via SIP in an Equity fund which can deliver 12% CAGR.
Yes, you read it right! Just a monthly SIP of Rs. 25,000/- can accumulate to a little less than a whopping Rs. 9 Crores at the end of 30 years!!! If you notice in the initial years, there isn’t a significant difference in between your investment amount and the value of your investment, but once you give time to your equity investments, it multiplies multifold! Einstein had rightly quoted, “The Power of Compounding is the 8th Wonder of this World!”
Unfortunately, investor behaviour towards equity investment is totally different. Even after having committed to a mutually set financial plan based on goal mapping, where they agree to invest in equity for long term, the daily volatility in equity prices tends to make them jittery. More often than not, they end up withdrawing money from his equity investments in adverse situations. You could say that its fear getting the better of them, but it is also a fact that investors approach towards equity is very different from other asset classes. For eg., we don’t constantly track our investments made in real estate or PPF on a daily or monthly basis! Do we keep calling our Real estate agent about price change in the area in which property is bought? Mostly the answer is NO. We patiently remain invested in PPF or Real Estate for 15 – 20 years or more! Than why not the same approach with your equity investments. Why do financial advisors get frantic calls when markets are down? Do investors rush to buy equities when markets have corrected by 20% in the same manner as we witness gold buying frenzy when gold prices plummet or when there is a big discount going on in a branded jewellery shops?
I have observed that investors do not tend to sell their gold, property or PPF investments as frequently as they sell their equity investments. This is because equity offers best liquidity and transparency in terms of price discovery. Although these are two major advantages for investors, mostly it works against the basic notion of long term investment in equity. SIPs reduce the burden of having to collect a lump sum first and then invest it. With SIPs, you can invest small amounts every month. You have the flexibility of even increasing your SIP amount. You just need to let your SIPs grow and let the magic of compounding work for you. Remember, there’s no right time to invest through SIPs. Now is always the right time.
Here are a few important Do’s and Don’t which will help investors:
Don’t Try to Time the market: You can’t. It’s best to give time to the market and average your investments via SIPs.
Don’t Leverage: it is a bad idea to leverage your position by borrowing money. It can wipe off your entire principal.
Don’t stop SIPs in falling market: It will defeat the whole purpose of your investments. SIPs perform best only if continued through all times – in good and bad market conditions.
Do Keep an emergency fund in Liquid: this could be 6 months of your monthly expenses.
Do Link your Investments to your financial goals, Not market situations: Investments should be made based on a Financial Plan and linked to your Financial Goals.
Do proper Asset Allocation and Diversify your investments across different asset classes: Adopt an Asset Allocation strategy and follow it religiously. Don’t put all your eggs in the same basket.
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