Most investors prefer Systematic Investment Plan (SIP) to invest in equity funds. SIP has gained a lot of popularity in recent times. This is because people have become aware of its many common benefits.
Reduction of minimum investment limit, discipline in investment, average cost of rupees, strength of compounding are some of the major advantages of investing in SIP. Also, there is no need to time the market to gain more profit or to reduce losses. The SIP collection stood at Rs 9,182 crore in March 2021.
This shows an increase of 6.3 per cent on an annual basis. This figure shows that more and more investors are turning to SIP for investment. The longer the investors invest, the more they will benefit. Investors investing in SIP should also keep in mind the points mentioned below.
Average holding period
if an investor invests for 20 years, then the average holding period for each SIP will be 10 years. The reason for this is that only the payment of the first installment of your SIP has completed 20 years. At the same time, your recent installment of SIP has not been completed even for a month.
In such a situation, even if a person has been investing for 20 years, the average holding period will be only 10 years. In this case, the investor should keep in mind the average holding period. The holding period should not be calculated from the beginning of the investment.
Strength of Compounding
One advantage of investing through SIP is that you are able to take advantage of the power of compounding. To understand how the investment is beneficial for a long time, let us see how much return is earned on an investment of 10 thousand rupees every month for different periods.
However, investors continue to invest through s but the major reason for concern is that many investors close their s before time . Many of those who stop investing before time withdraw funds before the time period is over.
It is commonly seen that people start investing with the goal of investing for 7-10 years, but stop it in the middle after three to four years. There can be many reasons why investors do not continue to invest in s . Some of the reasons are discussed below:
stock market fluctuations
Generally, investors are told that after 10-15 years, they can expect returns at the rate of around 12-15 per cent per annum. However, these returns are not uniform (this means that we cannot expect positive returns every year, whereas in fixed deposits we do.). The reason for this is that equity funds have an impact on market fluctuations.
In this way, there are also fluctuations in the benefit of investors due to the market being up or down. The returns from investment in equity funds are never the same. If we look at the return of Nifty 50 in the last 20 calendar years, it is found that the highest return of 78 per cent (2009) was received by an investor.
At the same time, -51.8 %(2008) minimum return was obtained. In the same way, if the market is up or down, the effect on the returns is also seen. It is not right for any investor to compare these returns with fixed income funds.
Find easy process Rdrshita and redemption
of mutual funds that are meant to bring transparency to invest money an investor. The NAV of the funds is available on a daily basis and the portfolio of funds is available on a monthly basis. This is very beneficial because investors are aware of where their rupees are being invested.
On the other hand, many times one has to bear losses because of this thing because sometimes investors get nervous due to negative news about a particular company. Many times people get caught up in panic and sell. It is possible that these securities are held in other instruments of investment like NPS and ULIPS, but the information related to this is not publicly available.
The convenience of easy redemption (redemption) in mutual funds also sometimes becomes a drawback. Since investors can easily redeem their investments, they start looking for redemption options as soon as they see a little less than expected returns.
Disgusted with the returns
Many investors are not satisfied with their returns and decide to stop investing in a systematic investment plan. Investors start evaluating the returns received in that period within one to two years of starting. At this point many investors feel that they have taken a wrong decision regarding investment.
However, he does not understand that the average holding period of two years is just one year. They start comparing the returns of their investment with other stocks or even Nifty or Sensex. It is totally like comparing between apple and orange but most do not want to listen to anything else because the instantaneous experience is not right.
Some investors shrug off mutual funds thinking that they will not get good returns from investing in these funds. At the same time, some investors decide not to continue investing in haste. If an investor decides not to continue investing in a short period of time, then he is deprived of the benefits that will occur in later years.
According to our internal research, the average value of all funds in equity funds (growth option) starting 10,000 every month 20 years ago (before July 1999) would have been as follows:
We can see in the above table that if an investor invests for 20 years, he gets 12.2 times in the best case and 3.3 times in the case of weakest returns.
Fluctuations and Probability of Negative Returns
It is generally observed that as the period increases, the expectation of negative returns and fluctuations decreases. To understand this thing better, we looked at the example of Kotak Flexicap Fund. It is a flexi cap fund and has been in existence for more than 10 years. Its AUM is the highest among all open-ended equity funds, except index funds, as on 21 February.
The cells marked with red color show the impact of the Kovid-19 epidemic, which is a very rare and unusual case.
In the above table, we can see that the probability of negative returns increases once the investment period is one year. Whereas after two years of the period, the scope of negative returns decreases.
At the same time, if the investment period is three years or more, then there is no negative return except in the year 2017-18. There is an improvement in the returns as the duration of SIP is more than five years.
The secret of successful investment in SIP
You must have understood that you do not have to time the market by investing through. But investors should adopt SIP for such a long time so that your returns do not have any impact on the rise or fall in the market. Warren Buffett started investing at the age of 11, but he became a billionaire only after he was 56 years old.
