It is heartening to see mutual funds playing an increasingly important role in wealth building process of investors in our country. While the sterling performance of equity and equity-oriented balanced funds has contributed significantly to this emerging trend, the acceptance of SIP as an investment mechanism by investors also allowed them to maintain discipline in their process and tackle the ups and down of the market. No wonder, the amount of investment being made through SIP every month has crossed Rs6,000 crore.
The ever-increasing number of SIPs being enrolled every month is a testimony to the growing popularity of this wonderful approach to investing. SIP is gaining popularity as it not only helps investors in tackling volatility in the market, but also because it allows them to build a large corpus required for some of their most important goals such as child’s education and marriage, buying a house and retirement planning. Besides, investors get to redefine their risk levels in a carefully controlled manner.
The general perception about SIP is that it is suitable only for those investors who do not have a lump sum to invest. In reality, SIP propagates systematic investing and that has nothing to do with the size of investment. It is a way of disciplined investing that allows investors to invest on a regular basis without having to worry about the market levels and the market movements in the short-term. Simply put, when you opt for regular investing, you abandon any strategy that might control timing of your investments. Hence, you continue to invest irrespective of market conditions. This strategy works very well partly because of “averaging” and partly because in the long run, markets move upwards, in spite of short-term falls.
As is evident, SIP is the best way to build up capital over a period of time. If you want to benefit from the true potential of the asset class that you invest in as well as from this wonderful strategy, you must continue your investment process irrespective of the market conditions. It is quite common to see investors panicking whenever they are faced with bouts of volatility and that often compels them to discontinue the SIP. However, if you continue to invest through these turbulent times, the final result would be astonishing. For those, who have a lump sum, but would like to invest systematically, investing through a Systematic Transfer Plan (STP) would be an ideal strategy.
While systematic investing has many advantages, it does not mean that you should not make lump sum investments. In fact, a combination of periodic lump sum investment and regular investment through SIP helps you in getting the benefits of both falling as well as rising markets.
As we all know, different asset classes behave differently over different time periods. Besides, each asset class requires a different time horizon and strategy. For example, equities require time commitment and hence you must have the patience to wait out the turbulent times. Therefore, even if you invest in equity funds through SIP, it is absolutely necessary to adopt a longterm approach. Many investors investing in equity and equity-oriented balanced funds do not commit to invest for longer periods. Needless to say, it is not the right thing to do. Remember, when you invest through SIP, say, for 5 years, your averaging holding period would be two-and-half years, which is not adequate for an asset class like equity. Therefore, the longer the time horizon, the better it is.
While regular investment allows you to tackle volatility and brings down the average cost, it is still important to keep an eye on the performance of funds in the portfolio. Remember, regular investing does not protect you from the poor performance of the funds. No doubt, making regular changes can be a fruitless exercise and hence you must select the funds carefully. At the same time, you should not hesitate in replacing a poorly performing fund with a fund with better prospects. Remember, long-term investing requires a commitment to equity as an asset class and not to the funds. Since the money remains invested in equities, even while making changes, you continue to get the benefit of compounding. Therefore, keeping track of the performance would ensure better results.