Systematic Investment Plans (SIP) – Many starters, few winners….
Systematic Investment Plans (SIP) as most of us know, is an investing methodology wherein you invest a specific SIP amount every month which results in averaging out of cost over a period of time. It also makes sure that you as an investor maintain the discipline of investing regularly in equity markets and your investments go through various bear and bull market cycles, hence benefitting you in the long run. SIP is an excellent way to achieve your medium to long-term financial goals. By investing every month, it makes sure you don’t put undue stress on your monthly budget and over the time your cash flow gets adjusted accordingly, just as you do when you buy a big ticket item such as a home or a car. With inflation monster reducing your money purchasing power year on year, it is imperative for every Indian household to invest in equities in some form or the other. With additional variations such as Top-up SIP, Systematic Transfer Plans, Systematic Withdrawl Plans available, investing and withdrawing systematically in mutual funds is a lot easier and streamlined and you can avail various options as per your requirement.
Let’s look at few numbers (not a recommendation – below fund is taken as a reference)
Source of below stats: www.moneycontrol.com
Investment of 5000/- per month in the above fund over a 20 year period has grown to a whopping 1.2 crores over a 20 year period giving a CAGR of 21.18% CAGR. The catch here is investing for 20 years – month on a month without fail, ignoring all the pessimistic market noise, various suggestions about markets from your family/friends and concentrating on your investment strategy without fail. It is no mean feat. Scams, valuation bubbles, financial meltdown, hung parliaments, Brexit, demonetization, back to back droughts etc. kind of events came and gone but as an investor, ones who withstood all these tests came out as a real winner.
Significant question here is how many investors who started their SIP’s in the year 1998 have actually continued their SIP’s all the way (of course ones who actually intended to invest till the year 2018 or beyond). The actual percentage will be quite low. So what prompts investors to switch out of the SIP abruptly and lose on to great compounding opportunity? As an investor, more than success stories, we must be aware of pitfalls which as a long-term investor we must avoid making sure we don’t discontinue SIP’s if the goal is not reached.
(1) Market volatility too hot to handle – Equity markets never move in a straight line. There can be repeated years of bear market phase (underperformance) followed by a sudden jump in market indices, much more than what an investor can anticipate. Markets do move up and down, much more than what an investor anticipates. No investor or greatest of experts can time the market, so never try it.There can be an extended period of severe market underperformance wherein the market moves down for an extended period of time and there is a pessimism all around as if the world will come to an end and indices will touch 0 mark. If you experience such a timeline during your investment days, that may be best at times to make an additional investment to your existing SIP’s. For a retail investor, sometimes it gets too hot to handle and the investor sells out their excellent investments at a loss. Learn to ignore the noise and have faith in your investments. You are the best judge of your investments. In a market, if you are investing for the long term, volatility is your best friend which will actually help you to generate wealth. The actual period of severe underperformance will be the deciding factor for how much returns you generate over the long term if you are investing SIP. Never be afraid of market volatility. Give it a ‘Jaadu ki Jhappi’.
(2) Getting easily distracted by the noise around you – You as an investor must learn to ignore noise around you and must concentrate on actual facts which matter to you. Long-term investing and trading are two different aspects and before initiating your investments, you need to decide which hat you want to wear. The only way to create wealth in the equity markets it to remain positive always, track your investments and make sure you don’t sell your winners because someone else thinks so, it is time to sell. Similarly, if your funds underperform considerably year on year, due to maybe fund manager has left, fund house overall investment practices have taken a hit, fund taking undue risks which are unwarranted, the fund is investing in businesses which are shoddy – don’t shy to switch to better performing fund. As an investor, have a decisive approach towards your investments. Many investors tend to terminate their SIP’s once market takes a severe downturn.
(3) Direct equity investing looks exciting, mutual funds are boring – Almost every other investor has a story to tell. When I was young, I bought few shares of company X which later reduced to 50-60% in value. Youngsters do find direct investing lot more exciting and happening wherein in mutual funds it seems pretty dull and boring. At times, I have suggested investors start their investment journey via mutual funds and once they are accustomed to the market conditions, there’s no harm in direct investing. Mutual funds may sound boring but are an effective way to create wealth effectively without consuming much of your day to daytime. There are lots of instances wherein investors have dumped mutual funds midway to invest in direct equities. There are investors who look at NAV daily and lose patience sooner rather than later. Compounding takes its own time and you should not disturb it ever.
(4) Not building adequate contingency fund – Amount invested via SIP should be one which you can afford to have it invested for the long term and it is assumed you will not need this money in a hurry. In some instances, provision of the adequate contingency fund is not done resulting in the redemption of investments midway. Contingency fund provisioning must be done before you initiate your long-term investments so that you have enough cushion to make sure you don’t redeem your long-term investments midway.
(5) Goalless investing – If you are investing without mapping it to a specific financial goal such as child education, marriage, your retirement etc, there is an increased probability of you redeeming your investments midway since you are not sure what purpose it is serving. You may redeem your SIP’s to buy a car or go on a foreign vacation, which may be otherwise would have been meant for your retirement, had you mapped your investments to your goals. Always map your investments to specific financial goals to have greater clarity of purpose your investments are serving at the first place.
(6) Switching frequently from one fund to another – Mutual funds, how good it may be is unlikely to be top performer year on year. Investors tend to look at short-term performance only and keep switching funds year or year. Consistent performers are better funds to hold for the long-term rather than flashy performers. Make sure you invest looking into the future and not what has performed well only in the recent past. One such drawback of such a strategy is that there is every likelihood of you accumulating too many mutual funds in your portfolio which eventually becomes difficult to manage resulting in poor returns.
(7) Underestimating the potential of Equity Linked Savings Scheme – Power of ELSS funds to generate wealth is often underestimated and is looked as an investment only to save tax. If you see the long-term performance of some of the ELSS funds such as Aditya Birla Tax Relief 96 or a Reliance Tax Saver, you will be surprised to see the extent of wealth they have created besides saving tax. Every investor has to save tax and there is no better medium to generate good returns in parallel by investing in ELSS funds, depnding on the risk profile of the investor, ofcourse. There are investors who invest in ELSS schemes with the sole purpose to save tax and take money out post 3 year lock-in is over or discontinue their SIP’s in ELSS funds inbetween. Mindset needs to change as how to approach investing in ELSS funds.
(8) Getting disheartened by low to negative returns in an extended bear market – Since no one can predict the markets, there can be extended period of low to negative returns and it can be really painful. There are investors who tend to lose patience here and switch out of mutual funds citing the reason that FD’s have given them better returns over a specific period. When an investor starts investing in mutual funds, volatility and extended period of low returns will be there and investors must understand that.
(9) Not scaling up investments with time – Investors also tend to get disheartened with the corpus they are able to generate with mutual funds over time. Investors need to keep realistic expectations from the funds. Investing a very small amount and not scaling up will eventually lead to you missing your end corpus amount with a big margin. It is significant for the investors to understand that they need to invest in accordance with their goals and need to gradually scale up investments over time. Even a 10% increase in SIP amount every year can make a big difference to your end corpus. ‘Top up SIP’s’ are now available to make sure you automate scaling up your investments over time. Investors should make full use of it and avail such an option while filling up SIP form.
(10) Initiating SIP’s for the first time in thematic or sector funds – There are times when specific sector funds are on the top of yearly charts in term of returns but may not necessarily the best investment choice for all investors. There are investors who tend to start SIP’s first time around into a sector or thematic funds or even make a big lump sum purchase. In case, the whole sector goes down in a short span of time and is likely to take a couple of years for it to recover, investors tend to lose patience and feels betrayed. Looking at dismal negative returns, they tend to stop their SIP’s and develop a strong resolve as to invest in equity markets ever again. Do remember SIP is an investment methodology and if not invested in a right manner, you can lose money in mutual funds also.
11) Selling mutual fund investments to buy real estate – As a society, we are obsessed with real estate investments. We often start with the right mindset to be investing in mutual funds for the long term but midway through our investments, lure to invest in real estate makes us destroy powerful compounding of our mutual fund investments. We stop our SIP’s going on for years, redeem our investments and buy a property without evaluating pro’s and con’s of such an action and what purpose it is serving as regards our financial goals.
Do you have your SIP story to tell? Please do share with our readers. In case, over the course of your investment journey in equity markets, what right and wrong strategies you undertook – do share that with our readers in the comments section below.
Disclaimer: Above article is for investor education purpose only. This article is based on my experience with equity investing. There is no recommendation here for any financial product. Please consult your financial advisor before taking any financial decision. Mutual Fund investments are subject to market risks, read all scheme related document carefully before investing.