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The Rules of SIP Investing
In the past 5 years, a number of top ranked mutual funds have given SIP returns in excess of 20% annualized (tax free). Over the long term, most top ranked equity fund SIPs have averaged 12-14% annualized returns
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Judging by industry data, Indians are finally warming up to the idea of SIP investing! Although SIP data is not available in the public domain, it is estimated that around 75 lakh active SIP’s exist today, with this number going up by a further 1.5 lakh every month. In other words, around Rs. 2100 Crores flow into various mutual funds via the SIP route on autopilot. (A year ago, this number was just about half of what it is today)
We’re hardly surprised – on paper, SIPs remain (by far!) the best place to channelise your monthly savings. In the past 5 years, a number of top ranked mutual funds have given SIP returns in excess of 20 per cent annualized (tax free). Over the long term, most top ranked equity fund SIP’s have averaged 12-14 per cent annualized returns. Compare this with the 4-6 per cent earned from traditional savings products (such as life insurance and recurring deposits) over the long term and the math makes it amply clear why SIP investing is picking up pace.
The Unfortunate Truth…
Impressive numbers notwithstanding, the bitter truth remains that only a handful of these 75 lakh SIP’s will actually end up living up to their true “wealth creation potential”! So while on paper, a monthly SIP of Rs 10,000 could potentially lead to wealth creation of Rs. 3.5 crore (assuming 12 per cent per annum returns) in 30 years…. more often than not, it ends up remaining just that – paper profits!
If you want to really create wealth from your SIPs, follow these five simple rules:
Rule No. 1: Understand how SIPs work
SIPs do not provide a fixed interest or constant rate of return. In fact, there may be extended periods of time when your SIPs may be in the red or not significantly profitable – and vice versa. Start off by understanding and accepting this fact, and you’ll already be ahead of the curve!
Rule No 2: Play the Long Game
Starting a SIP for the short term is futile and may potentially lead to losses. We categorically discourage clients from starting short term SIPs that are speculative in nature or being started “just because markets are looking good”. A minimum time horizon of 5 years is essential for equity SIPs, and a preferable time horizon is 10 years or more – as that’s when the real effects of compounding start kicking in to create wealth for you. So invest the amount you’ll be comfortable putting away for the long term - and not a rupee more than that.
Rule No 3: Be Dispassionate
In the case of SIP investing, strength lies in passivity! It might sound surprising to you that starting your SIPs and forgetting about them will create more wealth for you than checking in frequently and making regular ‘tweaks’ to your portfolio. So shut out the ‘market noises’ and ignore the pundits. If markets fall, you’ll wind up buying more units for the same SIP amount. In the long run, you’ll make money!
Rule No 4: Don’t “Churn & Burn”
If you’ve chosen a good set of funds to begin with, there’s limited (if any) value addition that you’ll achieve from ‘churning’ your investments or ‘replacing non performers with better performers’ regularly and so on. Keep your SIPs running in these long term high performers unless something changes dramatically. Frequent churns are bound to affect SIP returns negatively.
Rule No 5: Link them to Goals
Linking your SIPs to tangible, quantifiable and important life goals is a brilliant idea! Before you start your SIP, ask yourself exactly what you are saving for. Align your SIP’s to specific, measurable and realistic goals (for example: “Rs. 5 crore at my retirement when I turn 60” or “Rs. 25 lakh by the year 2020 for my daughter’s education”). This actually makes it infinitely more likely that you’ll save in a disciplined manner, keep your SIP’s running for the long term, and actually end up achieving those goals! When you can attach a real outcome to the purpose of your saving, you’re far more likely to actually work towards that goal rather than saving blindly without an objective.
We wish you good luck with your SIP investments and hope they end up creating wealth for you!