Posted On Friday, Oct 09, 2015
After much analysis and debate, you have taken the plunge and invested in the equity fund that makes most sense to you.
A few days after you have started your SIP in the fund (SIP being Systematic Investment Plan, a step by step way towards generating wealth) you read in the papers or watch the noise on TV, which says equities are in a free fall, or are too risky or are too overvalued or are too anything...
“Don’t invest! If you have then pulled the plug on your investments before you lose all the money” you hear. It is therefore natural for one to reach for the panic button and wonder why we even thought of investing in equities.
Here are 5 reasons why you should lock that button away for the next 10 years (that’s right - investing in equities = long term!) and continue with your SIP.
Reduces the average cost
In SIP one starts investing a fixed amount regularly. Therefore, one end up buying more number of units when the markets are down and NAV is low and less number of units when the markets are up and the NAV is high. This is called rupee-cost averaging. Generally, those who are not well versed with the swings of the market would stay away from buying when the markets are down. They mostly tend to invest when the markets are rising. Starting an SIP tends to bring discipline to our portfolio as SIP investors buy even when the markets are low, which actually is the best time to buy! As an investor you don’t need to time the market. Always remember markets will fluctuate but your financial goals won’t!
Invest regularly and experience the power of compounding
Compounding is the ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings. In simpler words, the interest you will earn from your invested amount will be re-invested, and thus increase your principle amount. Starting a Systematic Investment Plan (SIP) will help you harness the power of compounding as you invest a set amount every day/week/month etc irrespective of the wild swings of the market.
Below is an illustrative example that shows how power of compounding helps to be a discipline investor from an early age and invest with SIPs.
|Amount of SIP (Rs.)||Frequency||Total No. of Years of Investment/ Age of Investing||Rate of Return||Total Amount Invested (In lakhs)||Corpus Build (In lakhs)|
Person A builds a corpus of Rs 30.81 lakhs while person B's corpus is only Rs 17.02 lakhs. So the difference of Rs 60,000 in amount invested made a difference of approx. Rs 13.79 lakhs to their end-corpus. That difference is due to the power of compounding. Hence, with disciplined approach and longer compounding period, investors can enjoy potential higher returns.
Market timing becomes irrelevant
One of the biggest difficulties in equity investing is WHEN to invest? Apart from the other big question WHERE to invest? While, investing in a mutual fund solves the issue of where to invest, SIP helps us to overcome the problem of when to invest. As per the earlier example, even if you were to pull the plug on equity investments, where would you then park your money? locker at home? bank account? None of which might help you build that corpus for your financial goal.
SIP involves disciplined investing irrespective of the state of the market as SIP investors buy even when the markets are low. When the markets are high, it may not be prudent to commit large sums at one go, thus balancing your portfolio. This makes timing the market less relevant, therefore reducing your worries about the state of your investments in volatile markets.
Does not strain our day-to-day finances (Power of easing your financial burden)
Mutual Funds allow us to invest very small amounts (starting from Rs. 100/-) in SIP, as against larger one-time investment required, if we were to buy directly from the market. This makes investing easier as it does not strain our finances. SIP, therefore, becomes one of the ideal investment options for a small-time investor, who would otherwise not be able to enjoy the benefits of investing in the equity market. Large investors who wish to accumulate their savings prudently might opt for a larger SIP amount.
Opportunity for building wealth
At Quantum, we are firm believers in the India growth story; we believe that there is enough potential in the country and the youth and enough entrepreneurial spirit, which if channelized correctly can propel the country to consistently being one of the fastest growing nations in the world. Of course, this growth depends upon infrastructure and opens government policies which will encourage rather than discourage this entrepreneurial spirit.
Therefore it makes perfect sense for you to invest in equity mutual funds for the long term, to help you achieve your financial goals. The fund that you chose to invest has to have values that reflect your own, if you are the slightly conservative investor, and then it may not make sense for you to invest in sector funds (which tend to carry more risk than diversified equity schemes). So if you do your homework and chose a fund whose investment philosophy resonates with you, then we recommend that you continue the SIP.
Building wealth takes time, the markets will rise and tumble, and not even the best analyst can accurately predict the ebb and flow of the stock markets. There will be times when your fund doesn’t do well, persist with your equity investment, keep the long term goal in mind and do not be swayed by short term views and opinions which keep changing with the hour.
Therefore, we always recommend that you do your research before you start or end your SIP in equity. Never exit a fund merely on hearsay. There will be many positive and negative reports about your fund in the media, as long as the fund is ensuring that remains true to label and does not deviate from its philosophy, so should you remain invested in the fund till your goals are met. While investing, have a long term approach and select the fund whose investment objective matches your financial goals and needs. Seek the help of a professional financial advisor, while doing both - buying and redeeming your funds.
Disclaimer, Statutory Details & Risk Factors:
The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Please visit – www.quantumamc.com/disclaimer to read scheme specific risk factors.
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