Yahi hai right way--to create wealth

All that an investor needs is to be able to differentiate a bad investment from good one—in order to create wealth successfully. However, over the last 4 years, it has become clear that managing one’s reaction to panic situations is as important if not more. It matters how you see and stay through the crisis. 

Data from Mutual Fund registrars suggests a manifold jump in investors investing through SIP. However, it is times like the present ones that have a potential to break this style of investing.  Investors (Informed or otherwise) either cancel or pause their SIPs (and/or lump sum investment) whenever stock markets have crashed sharply over a short period of time. The general message that we get during our regular interaction with investors is “My sip (or lump sum investment) has just completed a year and it’s running in a loss. Markets are looking bad, so I will renew my sip or invest further –as the case may be—once the situation—domestic or global—improve!”

We try to impress upon our clients that it’s the worst thing to do—if not disastrous! The whole idea of SIP is to invest regularly through highs and lows of the market. More often than not we witness the case of another investor who started investing when markets started improving –having stopped at a high level (high defined by hindsight only)! They believe they have done a smart thing…but have they really?

We have a case study (though hypothetical) to prove our point.

Consider an investor who invests regularly in fund that tracks sensex. The investor invests Rs. 10,000/- per month regularly since 1997. In the 15 odd years, he would have invested close to Rs. 17.50 lacs. The investment would be worth approximately Rs. 48 lacs—a return of 13% CAGR.

Contrast this with an investor who pauses every time the market crashes. This investor—typically one amongst us—would be congratulating himself on stopping his investments sometimes in the year 2000 when the market dropped to sub-4000 levels from a peak of 5900. He would have probably started investing when the market approached the 4000 levels again. He would have stopped investing again when the market crashed to 15000 levels from a high of 21000 sometimes in 2008 mid. He would have in all likelihood started investing again in the middle of 2009 post general elections—when the market went up spectacularly.

  

This strategy—which seems to be the most natural thing to do—would have lowered his returns. Instead of earning a profit of Rs. 30 lacs on an investment of Rs.17.50 lacs, he would have earned Rs. 16.50 lacs on an investment of about Rs. 12.30 lacs.

Moral of the story: - We do not know how long the market will remain listless…however, what we do know is that the only sensible thing to do is to continue with your investments. Or as Lord Krishna would have preached: - karma karte raho….Since, SIP ensures that you also buy when markets are down, you should be glad that the market is giving you an opportunity to buy low. Seems to be some kind of a cruel joke, but then is it not the truth….