Emotions, unfortunately, play a huge role in the investing process. Over the long term, how you control your emotions at every stage holds the key to success. It would be, therefore, safe to assume that emotional quotient (EQ) is far more important than intelligence quotient (IQ).
The time horizon over which you want your corpus to grow is one of the most important elements in the investing process. Most investors make the mistake of timing the market — entering and exiting on the basis of daily price movements — instead of adopting a goal-based strategy.
Information overload — access to a variety of sources — could also lead to confusion, unless one knows what exactly he/she is looking for, in terms of returns, time-period and purpose of investment. Always factor in short-, medium- and long-term goals before investing in any product, especially if you are going in for equity-related investments. For those whocan’t keep track of daily market movements , the systematic investment plan (SIP) of mutual funds is an ideal option. Not only is it simple to follow, but it also brings discipline to financial planning.
For instance, if 15 years ago, at 25 years of age, you had set aside a monthly SIP of R10,000 in a diversified equity mutual fund, the market value of your investment would be R1 crore today. Principal invested in 15 years would be R18 lakh, while the rest would be the returns generated at an annualised rate of over 20%.
The point here is, if you had invested without missing out on a single month — and stayed put for the entire 15-year period, ignoring all the noise about market volatility — you would have earned a return of over 20%. Thus, you would have achieved a growth between 5 and 10
times through the simple mechanism of SIP.
Let’s take another example. If you had invested a lump sum of R1 lakh in a similar fund at 25 years of age and stayed invested till 40, the amount would have ballooned to R17.62 lakh at an annualised return of 21%.
Now, consider a third scenario. You discontinue your SIP after five years, but hold on to your investments of R6 lakh, which you had made by putting in R10,000 a month for five years. The corpus at the end of 15 years would be R30 lakh, even after discontinuing the investment, just by holding on to the amount for a long period of time.
So, what do we learn from the above discussion? Never time the market, monitor your investments regularly and have patience. Had you redeemed your investments during the downturn of 2009, you would have missed out on the spectacular rally that followed last year. Investing is a simple process; just remember, the longer you allow your corpus to grow, the higher the returns you can expect.
Simple is effective:
*Information overload — access to a variety of sources — could lead to confusion, unless one knows what exactly one is looking for, in terms of returns, time period and investment purpose
* Always factor in short-, medium- and long-term goals before investing in any product, especially if you are going in for equity-related investments
* For those who can’t keep track of daily market movements, the systematic investment plans (SIPs) of mutual funds are ideal
By Brijesh Damodaran
The writer is managing partner, BellWether Advisors LLP
