Why investing through Systematic Investment Plan (SIP) is just the starting point?
Indian equity markets are experiencing exciting times, not because markets are scaling new highs but because of a reason of a different kind. The assets under management (AUM) of equity mutual funds have swelled to Rs 5.91 lakh crore at the end of June 2017 from Rs 4.28 lakh crore at June-end previous year. Retail investors, slowly but steadily have realized the significance of investing in equities via Systematic Investment Plans (SIP) every month to achieve their medium to long term goals. In addition, Systematic Transfer Plans (STP) have also come in focus for moving money stacked in FD’s making way into the equity market in a staggered manner.
There has been a notable difference this time around wherein retail investors have in fact continued with their SIP’s during events such as demonetization which is heartening to watch. Indian retail investors should be the ones who should in fact reap the maximum benefits of the Indian Growth Story, creating huge wealth in the progress and achieve their long term goals with ease. These are early days yet but we hope that the retail investors will keep up the good work of investing systematically without bothering if the market is at 31K or 25K or 45K. Remember the famous quote – ‘Time spent in the market is more significant than timing the market’. If you have understood the real essence of this statement, you will be very successful as an investor.
First step of deciding to invest in mutual funds is great. But how much to invest? Majority of first time mutual fund investors we have interacted with have started with an initial SIP of varying proportions from 2K, 3K, 5K to 10K per month. This is a great step in the right direction. Congratulations!!! But it is equally important for you as to not be complacent and move forward with the next steps diligently.
Next very significant steps, that needs to be pursued are:
Understand and zero-in on their medium to long term goals (which you are looking to achieve by investing in equity mutual funds). Make sure you involve you family while finalizing on the goals. Normally deciding on goals happens even before you have started investing as you map your investments to goals. In case you haven’t still carved out your goals, please do.
Keep each goal as a separate goal, choose funds strictly as per risk profile, finalize on each goal corpus you are looking to achieve keeping inflation in mind, monthly contribution you will need to make for that specific goal and by how much percentage amount you will need to increase you SIP amount going forward in case current contribution isn’t enough. Where most investors get it wrong is that they decide on the final corpus without taking inflation into account and thus every goal seems a cakewalk.
Strictly avoid investing randomly in mutual funds as its very difficult track them all. An investor should have a clarity in the mind as to the reason to invest in a specific fund.
Though i have mentioned it above but still i would like to stress on the fact that deciding on a final corpus, taking inflation into account is paramount.
Let’s look at some numbers:
For instance, if you as a parent wants to invest for your child higher education corpus which will cost approximate 40 lakh in today’s time which is 20 years away. Taking into account inflation rate as 8% – Inflation adjusted goal cost will be close to 18,643,828. Isn’t it mind boggling? Assuming the return on investments will generate 15% annual returns, investment required will be for 20 Years.
As an investor, we need to understand and realize that the monster called ‘inflation’ which will decrease our purchasing power year on year and for the goals which are one or two decade away, your corpus in today’s time will hold little value then. Only way out is to put your money at work and generate significant inflation beating returns in the long run. Above instance is just for one such goal. You can very well imagine corpus you will require for your other life goals including retirement.
Let’s assume that if your current age is 30 and you have defined 60 as your retirement age. In today’s terms, your expense is 1 lakh per month. What will be your future needs post retirement?
If you decide today to invest Rs. 1,00,000 as lump-sum amount towards your retirement goal accumulation, in addition to this lump sum investment, you will need to invest Rs. 11,044 per month for 30 years to accumulate a retirement corpus of Rs. 8,52,11,619, which could provide you a cash flow of Rs. 6,02,258 per month which is 1,00,000 per month expenditure in today’s time for 20 year’s time. In addition to this, you may want to accumulate even more to take care of any emergency medical expenses. Accumulation of such a big amount seems very difficult but investment of 11,044 per month for next 30 years seems more reasonable. That’s why early you start investing, better it is as when you are in your late 40’s and early 50’s you will try to play the catch up game and accumulation of such a big amount will be very tedious at that point of time.
Bottom-line: Follow ‘Goal Based Investing’ approach. List down your goals, prioritize them and map your mutual fund investments with your goals. You should have a clear idea as to how much you need to invest per month to achieve your goal. In case if such an investment is not possible at the current juncture, increase your SIP amount as and when your salary increases.
Investing as per your risk profile is paramount. If you are a conservative investor, you will not like yourself to spend numerous sleep less nights in the advent of market volatility day in and day out. So investing in a particular equity mutual funds category to earn relative stable return may be better option. You can always compensate for the relatively lower corpus by starting early. Stay away from flavor of the month like mutual funds and look for consistently performing mutual funds.
Bottom-line: Invest as per your risk profile.
Keep an upper limit on the number of mutual funds you would like to have in your portfolio. Sometimes as our investible amount increases, we unknowingly keep on adding mutual funds resulting in a cluttered and unmanagable portfolio. 5- 6 funds should be good enough.
Bottom-line: At any given point of time, limit number of mutual funds to 5-6. Have a high conviction in the funds you invest in.
Don’t compare returns of the fund in one category with the returns from another category. Do the peer comparison. Most of the times investors end up comparing returns of a mid and small cap fund with a large cap fund. Large cap funds comes with their own degree of stability and thus may suit a particular set of investors.
Bottom-line: Do an apple to apple comparison. Do a peer comparison.
Don’t get bogged down by market volatility. In the long term, volatility is investor’s best friend. Keep investing systematically and do small lump sum purchases in case there is a knee-jerk reaction by markets due to some domestic or international turmoil. Never ever stop your SIP’s when market tanks.
Bottom-line: Always be disciplined with your mutual fund investments. As an investor, you should always be ready to take advantage of an adverse market situation and buy in a staggered manner when market tanks. Investment done in worst of times provides the best returns.
Learn to separate the wheat from the chaff. With the amount of information available these days, there’s always a possibility to be bogged down by someone’s weekly or monthly negative market outlook. Make sure you keep your focus intact and keep investing in quality mutual funds.
Bottom-line: Always have solid reasoning before you do anything. This will help you to keep your detractors at bay.
Learn from your mistakes and move on. It can very well happen that you invested in a fund which didn’t give even benchmark beating returns in successive years. Immediately switch on to the winning horses and move on.
Bottom-line: You should always keep the positivity around you intact to have correct state of my mind. It is important to acknowledge mistakes, ponder over the possible cause and most importantly switch to better funds.
Investing in equity markets is a journey spanning multiple decades depending on the time frame your each goal has. Most of the above points we have mentioned are the ones which investors must be already aware of but implementation in the key. A disciplined investment approach through a compact mutual fund portfolio clubbed with increase SIP amount year on year can be the masterstroke which can help you realize your long term goals. Realize the power of compounding and start investing today.
Disclaimer: The author has investments in mutual funds via SIP mode and opinion may be biased. The write-up is for information purpose only and is not a recommendation of any sort to the readers. Mutual funds are subject to market risks. Please consult your financial advisor before taking any financial decisions.