Ralising the importance of SIP investments, several investors invest in mutual funds via SIP (systematic investment plan). Assuming that you are already aware of what is a mutual fund, here are 3 golden lessons for investors to accumulate more money using SIP investments.
Rule 1: Completely understand how SIP mutual funds work
Several investors migrate to SIP from fixed-income securities with a below-average understanding of how the SIP mechanism works. Attracted by past returns ranging from 12 to 14% over a long period, they invest without realising that these returns are non-linear in nature. There have been innumerable instances wherein the returns on SIP are negative for the first 2-3 years, only to cross double digits within a few weeks or months! The magic of SIP investments can only be completely realised through complete calmness, high levels of discipline and patience. If low return phases aggravate you, or if you are investing in mutual funds via SIP with the prospect of consistent yearly growth, you’d never realize their full potential. So do bear in mind that aligning your personal expectations concerning your SIP journey is very essential.
Rule 2: Do not keep stopping and resuming your SIPs
Possibly the worst thing you can do to your SIP investment is stopping and starting them owing to the ups and downs in the equity markets. Let’s understand this better by evaluating how investors react to market volatility. Bullish cycles invoke ecstasy, and most investors begin their SIP journey near the end of these bull markets, as they feel confident by witnessing encouraging past returns. Bearish cycles breed despair and fear, and several investors stop their SIP after markets have taken a hit. In doing this, one takes away a significant portion of the wealth generation potential as the biggest benefit of SIP is Rupee Cost Averaging, which no longer accumulates. In fact, doing this will keep the average cost of your acquisition higher than prevailing NAVs (Net Asset Value) at most times, which might result in poor long-term returns. So, understand that for your SIP investments to work, you must take your sentiments and market timing out of the equation. Stopping and beginning them frequently may only result in a bad outcome.
Rule 3: Align them to your financial goals
SIPs in volatile growth assets work best when they are aligned to clearly defined, measurable, and specific goals. Interestingly, it is observed that random SIP investment amount such as Rs. 3758 per month tend to continue longer and with more discipline, than round figure SIP investment amount such as Rs. 3500. This is likely because the former was likely to be started after a reverse calculation using an SIP calculator, for a specific goal such as your kid’s education or your retirement. On the other hand, the latter is likely to be started on an ad hoc basis. For best results, create a financial plan before beginning your SI’s and consistently track your progress.
As an investor, ensure that your mutual fund investments are in line with your financial goals, investment horizon, and risk appetite. Happy investing!