Systematic investing can help you move from the sidelines
Hemant Rustagi September 9, 2014The stock market has been doing well over the past year or so. However, investors' reaction to this phenomenal run has been mixed. On the one hand, there is a small section that has been investing in equities and is willing to commit more, on the other hand there is a large section of investors that has been waiting on the sidelines faced with the dilemma of whether to invest or not. The trend highlights retail investors' apathy towards this wonderful asset class that has the potential to perform better than other asset classes and provide positive real rate of return over the longer term.
One of the reasons that have kept retail investors away from equities is their lack of faith in the sustainability of returns. Their not-so-good past experiences and the volatile nature of the stock market makes them vary of taking the plunge. As a result, they have missed out on the initial part of the rally.
The truth is that a combination of systematic investing and long-term approach can ensure investment success for every equity investor. While the long-term approach helps in negating the impact of short- and medium-term volatility on the portfolio, a disciplined investment strategy ensures that one doesn't commit too much at a particular market level.
It is also important for investors to choose the right medium of investing in equities. For a common investor, mutual funds have proved to be a better option and continue to be so.
For this very reason, it is always recommended that individual investors, who want to build wealth through smaller contributions, should invest through a Systematic Investment Plan (SIP).
It is heartening to see a steady increase in the number of investors following this wonderful approach. However, the overall number still remains disappointing. In fact, even those who start investing in equity funds after careful planning and commitment to invest regularly are often found guilty of putting a halt to their investment process abruptly, especially when they are faced with adverse market conditions.
It is not to say that one should not make lump sum investment in equity funds. It's just that a disciplined approach takes away emotions from your investment process. In fact, a combination of a lump sum and systematic investing produces the best results for long-term investors.
If you are one of those investors who have stayed away from investing in equity funds so far, it's time for you to make up your mind and begin your investment process through SIP.
However, make sure you don't start investing in equity funds because the stock market still has a lot of steam left. You should invest in equity funds with an objective to achieve your long-term goals such as children's education and your retirement planning. When you invest for a time horizon of 10-15 years, you don't have to bother about the current market levels.
Remember, too much of experimentation and adhocism can spell disaster for your equity fund portfolio. Also, don't make the mistake of thinking that a systematic investment approach alone can get you healthy returns.
There are a few other factors that require your attention for your portfolio to do well. Here are some of these factors and how your need to tackle them:
Be sure about how much you can invest through SIP: Investors often make the mistake of starting their investment process without having a clear idea of how much they can invest every month. Many a time, in their effort to make up for the lost time, they start investing a larger sum every month that they find it difficult to continue after sometime. In the process, they stop investing and hence interrupt their long-term wealth building process. Therefore, you must start conservatively and gradually increase the amount to ensure continuity. Budgeting can go a long way in ensuring this.
Invest for the longterm: It is quite common to see investors signing for SIP for a year or so even while investing in equity funds. While some investors do so thinking that they will renew it every year, there are others who want to see how it works and then take a long-term call. The problem is that when they assess the performance of their investment through SIP after one year or so, they often feel disappointed especially when the markets are in the midst of a volatile phase. Surely, this is an illogical way of assessing not only the performance of an asset class like equity but also the effectiveness of a powerful mechanism like SIP. The right way would be to have a clearly defined long-term time horizon right at the beginning so that you don't feel compelled to abandon this process during the tougher times. This alone can go a long way in maximising your return as investments made at lower levels will improve your long-term returns.
Choose the right funds: It is important to invest in well-diversified funds even while investing through SIP. Although volatility in the stock market helps investors in benefiting from averaging, investing a significant part of the portfolio in aggressive funds like pure mid-cap funds, thematic and sector funds may not be a good idea just because they tend to be more volatile than their well-diversified counterparts. Remember, too much aggression in the portfolio doesn't guarantee higher return. In fact, it can expose you to higher risk and derail your investment process. Of course, it makes sense for a long-term investor to have some exposure to mid-cap segment of the market. However, the bread and butter of the portfolio should be large cap or large cap oriented funds. Therefore, investing in multi-cap funds can be the answer to this dilemma as the fund manager has the flexibility of rebalancing the allocation depending on which segment of the market he thinks will do well going forward.
Opt for growth option while investing through SIP: The power of compounding works out the best when you invest for the long-term and allow the gains to remain invested. Taking out money at a regular interval, say every year, by way of dividend, would defeat the very purpose and hence the results are likely to be disappointing. Therefore, you must opt for "growth" option.
As is evident, a disciplined approach can help you tackle the dilemma of when to start investing in equity funds. If you follow the guidelines, nothing can stop you from achieving your long-term goals.
Hemant Rustagi is the CEO of Wiseinvest Advisors