Equities and SIPs are indeed a powerful combination. Take any equity mutual fund and invest in it through a Systematic Investment Plan (SIP) for a minimum of 10 years, and you’ll notice that the annualized returns on SIP mutual funds are significantly higher than any other asset class. Assuming that you are already aware of the workings of mutual fund investments and what is a mutual fund, here are three golden lessons for investors to get more money:
Rule 1: Completely understand how SIPs work
Numerous investors wander from fixed-income securities to SIPs with little to no understanding of how the SIP mechanism works. Solely attracted by the past returns ranging from 12 to 14% over a stipulated period, these investors invest without understanding that these returns are non-linear. There are times when the returns on SIP investments are significantly low or even negative in the first few years, only to cross double-digit returns over the next few weeks or years. The magic of SIP investments can be truly realised only when practices high levels of discipline, complete calmness, and patience. If you get aggravated by low return phases, or if you are investing in mutual funds with the sole purpose of consistent yearly growth, you might not fully realise the potential of SIP.
Rule 2: Do not keep pausing and resuming
One of the worst things you can do to your SIP is constantly pausing and resuming them due to the ups and downs in the equity markets. Let’s comprehend this better by assessing how investors retort to market volatility. Bullish market raises elation. As a result, most individuals start their SIP journey near the end of these bull markets, as they feel confident by perceiving significant past returns. On the other hand, bearish cycles invoke fear and despair. Hence, several investors pause their SIPs after the markets take a hit. In doing this, a significant portion of the wealth accumulation potential is lost as one of the biggest benefits of SIP investment is Rupee Cost Averaging. In fact, rupee cost averaging helps to keep the average cost of acquisition of mutual fund units higher than the prevailing NAVs (Net Asset Value) at most times, which might result in poor long-term returns. So, to fully benefit from the potential of SIP investment, make sure to remove your sentiments and market timing out of the equation.
Rule 3: Align your SIP investments to your financial goals
SIPs in mutual fund investments work best when they are allotted to clearly defined, and specific, and measurable goals. Interestingly, it is discovered that a random SIP investment amount such as Rs. 4358 per month is believed to continue longer and with more discipline, than a round figure investment amount such as Rs. 4000. This is because the former was likely to be started after careful consideration and reverse calculation using an SIP calculator, for a specific investment objective. On the other hand, the latter is probably started on an ad hoc basis. For best results, it is advised to create a sound financial plan before starting your SIPs. Do not forget to consistently track your SIP investments. Happy investing!