The capital markets are the tantalizing pulse of any economy, as the capital market indices to an extent reveal the confidence of investors (both domestic as well as foreign) in the economy. But the present volatility of the Indian equity markets steered mainly by debt-overhang situation in the Euro zone and sovereign rating downgrade have dented the confidence of many of you investors and may have even sent shivers down the spine.
Since the last peak of the Indian equity markets (attained on November 5, 2010, where the BSE Sensex was at 21,004.96), we are still down by good -24.5%, and on year-to-date (YTD) basis by about -22.9%; with of course a series of intermediate impulse and correction. And putting a traders hat, some of you may have also indulged in immense trading, thus trying to time series of peaks and troughs in this market - and may have even found it to be thrilling experience. But let us apprise you that a trader is good only until his last trade. You don’t know what the future has in store for you - good, bad or ugly?
Remember the thrill of timing the market, can give you a kick, but the kick can kick you out.
We believe that while the markets have turned turbulent at present in the last one year, it is important to stay invested and of course do more value picking.
Data as on November 24, 2011
(Source: ACE MF, PersonalFN Research and inputs from the book: “The Scam")
The chart above reveals that over more than two decades the Indian equity markets have witnessed a series of both - positive as well as negative economic and political events. But a noteworthy point is that only those who have shown their perseverance to stay invested for the long-term have gained despite such impulse and corrective phases steered by both positive as well as negative economic events occurring across the globe. If were to invest a sum of Rs 100 on November 26, 1991 (when the Sensex was at 1,855.94), the same today would have yielded a sum of Rs 854 as on November 24, 2011, thus clocking a whooping return of 754.5% on an absolute basis. On the other hand all those who have participated in exuberant phases of the equity markets or acted on the wrong advice of investment consultant or even engaged in trading have either lost wealth or clocked petite returns.
Hence, we believe that it is imperative for both new as well as existing investors to refrain from making blunders of timing the markets, or get carried away by the exuberance created by the market. The Systematic Investment Plan (SIP) route offered by mutual funds can help you tide the volatility of the equity markets well (by investing systematically); but a long-term investment horizon is indeed needed.
What is SIP?
To simply put, SIP is a mode of investing in mutual funds which enables you to invest systematically and in a regular manner. The method of investing is similar to your investment in a recurring deposit with a bank, where you deposit a fixed sum of money (into your recurring deposit account), but the only difference here is, your money is deployed in a mutual fund scheme (equity schemes and / or debt schemes) and not in a bank deposit, and hence your investments (in mutual funds) are subject to market risk.
A SIP enforces a disciplined approach towards investing, and infuses regular saving habits which we all probably learnt during our childhood days when we used to maintain a piggy bank. Yes, those good old days where our parents provided us with some pocket money, which after expenditure we deposited in our piggy banks and at the end of particular tenure we saw that every penny saved became a large amount.
SIPs too work on the simple principle of investing regularly which enable you to build wealth over the long-term. In case of SIPs, on a specified date which can be on a daily basis, monthly basis, or on a quarterly basis, a fixed amount as desired by you, is debited from your bank account (either through a ECS mandate or through post-dated cheques forwarded) and invested in the scheme as selected by you for a specified tenure (months, years). So, you have fewer hassles while investing as well as tracking your investment dates.
It is noteworthy that SIPs imbibe in them the following benefits, which can help keep your financial worries at bay and can germinate regular investing habit in you, thus aiding to grow you wealth in the long-term.
Your every bit of savings makes you rich
(Source: ACE MF, PersonalFN Research)
In a nutshell...
All of us invest in the equity markets with an objective of wealth creation, but if a systematic step is taken by adopting the SIP mode offered by mutual funds; it will not only infuse regular saving habit but also help you make your financial dreams come true - be buying a dream house, buying a car, providing good education to children, getting them married well, or even retiring. While you may try to create wealth over the long-term by investing in equities, timing the equity markets can land you on the wrong foot and erode wealth. Adopting the SIP route and subscribing to good habit of saving and investing regularly, as we learnt in our good childhood days where we use to maintain a piggy bank, will work wonders to make our dreams come true.
This article was written exclusively for Equitymaster, India's leading Independent research initiative. Trusted by over a million members all over the world, Equitymaster is known for its well-researched, unbiased and honest opinions on the Indian Stock Market.