In the past few months, lakhs of people have invested in mutual funds via the SIP or systematic investment plans. There has been a rapid rise in SIP inflows and people invest nearly INR 5,000 crores on a monthly basis via this option. As compared to the current scenario, it may be noted that in early 2014, investors had placed only INR 1,200 crores per month in SIP plans of mutual funds. There has also been an increase in the average size of an SIP ticket from INR 1800 to INR 3200 every month.
It is important to note that there is concern in some investors about putting money in SIPs when the markets are at their peak levels. SIPs assist investors to ensure that his/her cost gets averaged out over some time period, thereby allowing purchase of additional units when costs are low and lesser units when costs are high. In the present situation when the markets are close to their peak levels, accumulation of units by SIP investors will come at an increased price, which in turn will raise the average purchase cost. Hence, some people want to wait till there is market correction. The question that now arises is whether or not you should stop the current SIP investment outflows to avoid purchasing units at higher prices.
The answer to that question is a resounding no from financial experts as well as from those investors who have been in the market for a long time. Over a period of several decades, experienced investors have come to understand that market noises and speculations need to be ignored and SIP investments should be continued every month, without fail. Such discipline is what has allowed the investors to create an impressive corpus and helped them realize their key financial and personal goals.
Timing the market or continuity?
Many of us who began investing in the early part of our lives often ended up making a few mistakes before eventually understanding the correct approach to investing. We usually begin the investment process by trying out equity funds. My foray into investment started in 2000 via purchase of some schemes. However, after only 2 years I lost my patience as there was no significant growth in investment. Hence, I sold the funds with minor profit. Later I realized that I had committed mistake as the markets began recovering post 2003. After realizing my mistake, I changed my attitude and started investing with a long-term view. Since then I have continued investing in mutual funds via SIP and have not wavered even one bit.
My resolve was tested by the market several times, especially during the 2008 crisis, but I continued with the understanding that I will not repeat my follies of the past. My persistent focus helped me accumulate money sufficient for the higher education of my child as well as indulge in certain luxuries like annual holidays and purchase of an SUV. I am also using the SIP method to save for retirement.
The above growth in my wealth would not have come to fruition if I had stopped my SIP fund investments midway. When SIPs are terminated abruptly, then it not only discontinues the power of compounding, but also results in a deficit in the corpus. If you want to become rich then you need to follow just one simple fact of life, i.e., if you have not achieved your goals as yet, then you need to continue investing and saving.
Experts have repeatedly stated that SIP in mutual funds help avoid emotions and imbibe a habit of saving regularly. Wealth advisors believe and know that periodical investment, not timing the market, is the key to wealth creation in the long term.
Small regular investments can become big corpus
There are many who get intimidated after they hear about the large SIP sums that have to be saved for certain life goals. For example, a person in his/her thirties will need a safety corpus of around INR five crores when he/she is 55 to 60 years old. This means that they need to invest more than INR 16,000 every month. Such a big investment is not possible for some people who are just starting out on their careers.
It may however be noted that generating a corpus of INR 5 crores is possible by increasing the monthly savings by 10 percent every year. For example, you can begin investing in SIP funds with just INR 2000 and then increase it by 10 percent every year. In 10 to 15 years as you climb up the ladder at work, it will be possible for you to invest INR 50,000 every month. Remember, the best part about SIP is the fact that people can begin with an amount that is as low as INR 500 and then slow increase the monthly investments as per their abilities.
Avoid investing in SIP mutual funds and then just leave it
Investing in SIP funds does not mean that you just need to keep putting in the money in a specific fund and not keep a lookout about the fund’s performance. The approach of “fill it, shut it, forget it” does not work when it comes to SIP investments. SIP investment is not just about ensuring that you choose a good collection of mutual funds during first investment and then just waiting for increasing profits. Certain mutual funds which were top of the charts ten years ago are currently in the bottom quartile with regards to returns and performance. In the long term, there can be a huge difference between bad and good market performers. Not reviewing the fund portfolio on a regular basis and continuing to invest in bad funds may cause the investor to miss achieving the final targeted corpus needed to fulfill his/her dreams.
When reviewing SIP portfolio, you should first stop investing in funds that are performing poorly and begin investing in good performers. Later, you should make a decision whether or not to fully exit from the underperforming funds. When moving to another fund, investors usually do not fully exit the older underperforming funds. This can result in a portfolio that is bloated and causes many problems in its efficient management.
It is important to not treat the SIP investments as periodical payments that you may make to other things, such as an insurance premium. It is important to voraciously eliminate underperforming funds from your SIP fund portfolio.
Reduce the overall expectations
Investors have to guard themselves against keeping unrealistically high expectations of their SIP investments. SIPs are not some magical financial instrument that will offer you increased profits under all kinds of market conditions. If you have recently begun investing via SIP, then you have to wait for some years before you start getting good returns. Investors who have been investing for a long time and built up savings via the SIP method can expect to see a substantial increase in their wealth.
Experts state that the better option is to invest according to a pre-fixed asset allocation. If considerable change in the asset allocation is allowed, then even using the SIP route cannot insure investors from suffering losses due to increased exposure to one type of asset class. If exposure of the portfolio to equities is above a certain level, then investors need to move a part of their investment into fixed income assert class to avoid losses.
Designate the SIP with a financial goal
Investment in SIP is not a never-ending process. It is vital for each SIP to come with a time frame as per your goals. This will make sure that a specific personal or financial goal is achieved in a set time with minimal levels of stress.
When you choose a goal-oriented method of SIP investment, then it will also act as a guide when it comes to selection of the correct class of funds and the necessary equity-to-debt proportion in the portfolio. It will permit you to be aggressive or conservation as per the goal. When you are close to your goal, then it is best to avoid equities as much as possible. In case your goal is far and require long term investment, then invest more in equities. This will be helpful in building the corpus, in the initial years, the middle years, and even in the final years of the SIP investment tenure when equity exposure has to be low.