Investors Need to Invest Regularly and Stay Invested

by Mr. Mahesh Patil, Birla Sun Life AMC

Often hear that “Time in the share market is more important than timing the market.”

It is extremely difficult for anyone to predict the swings in the share (equity) market given its intensely dynamic nature.

Every time someone who is unfamiliar with market dynamics tries to time the market, she takes an uninformed and uncalculated risk.

Simply put, every time the stock market hits a high level, some investors enter the market thinking that since the market is up, returns will be good.

Similarly, when the markets are down, some investors exit the market, thinking “what’s the point, I have lost money anyway”.

So, how can investors still make the most of the equity markets despite of its volatility?

The answer is- through Systematic Investment Plans (SIPs).

It is the best way, especially for newer investors to approach the equity markets for long-term wealth creation and attaining financial goals.

In a SIP, the investor regularly invests a sum of money every month into buying units of a mutual fund (MF). Because investment is made in small parts or instalments, SIP helps investors avoid the risk of timing the markets and creates wealth in a disciplined manner by averaging the cost of investments.

 

Mahesh Patil, Birla Sun Life AMC

Here’s how investing through SIPs would benefit an investor.

Regular investing makes a difference..

SIP encourages a habit of regular saving and enables disciplined participation in the market despite its ups and downs.

For example, let us cover a complete market cycle and assume that an investor was investing Rs.5,000 per month in an SIP from July 2008 to June 2013. This means an investment of about Rs.3 lakh, which in a period of five years would have grown to Rs.3.67 lakh. This is a tax-free return of 8% per annum, and that too when the markets are going through some difficult times.

Reduces the risk of lump sum purchases..

Since a small fixed amount is invested across time, SIPs can also help in reducing average cost in volatile or falling markets. For example, if one invests Rs.1,000 per month at a price of Rs.10 per unit in the first month, he/she gets 100 units. If the price falls to Rs.9 per unit next month, he/she gets allotted 111 units. If the price drops further to Rs.8, the investor gets 125 units.

Therefore, by investing Rs. 3,000 over 3 months, the investor gets 336 units at an average unit cost of Rs.8.9 per unit. Now if the investor had invested the entire amount in the first month itself, she would have garnered only 300 units. Thus, SIPs help lower the average cost so that investments can buy you more units, leading to potentially better returns.

 Power of compounding..

The benefit of compounding becomes more significant when one starts investing early.

For example, assume Ram is Mr. 20 years old and starts investing Rs. 5,000 per month till he is 25. The total investment made by him over five 95) years is Rs.3 lakh (5,000 x 60 = 3 lakh ). His friend Mr. Shyam does not start investing monthly, but invests the entire amount of Rs. 3 lakh at the age of 25. Both of them decide not to withdraw these investments until they turn 50.

Assuming a growth rate of 10 % per annum, Mr. Ram’s investment of Rs. 3 lakh has grown to Rs. 46.7 lakh, whereas Mr. Shyam’s investment of Rs. 3 lakh has grown to Rs.36.2 lakh.

Mr. Ram’s decision to start investing earlier than Mr. Shyam with smaller contributions through SIP has made him wealthier by over Rs.10 lakh.

Have your cake and eat it too.

Equity SIP investments over a year attract  0 % long-term capital gains tax. The short-term capital gains tax for investments less than a year (365 days) stand at 15 % for equity funds. Hence, the investor gets the benefit of taxation and capital appreciation by participating in the equity market if he/she remains invested for over a year.

Small sums, big gains..

 With monthly SIP contribution of as low as Rs. 500, investors can easily start investing in SIP without impacting their monthly budgets. They can continue maintaining their current lifestyle, while contributing towards securing their financial future at the same time.

What’s more, they also get tax benefit under section 80 C of the Indian Income-tax Act by investing in equity-linked saving schemes (ELSS).

Clearly, there is long-term money to be made in good MF schemes. But to get there, investors need to invest regularly and stay invested.

The key to successful investing is,  therefore,  to invest regularly, and with a dependable investment partner having a good long-term track record.

About the author...

Mr. Mahesh Patil is co-chief investment officer at Birla Sun Life Asset Management Co. Ltd.

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