Systematic Investment Plans (SIPs) are the easiest way to create wealth over the long term. But, creating wealth via SIP investment needs a long term strategy and a simple understanding of the market. You cannot leave everything on the hands of the fund manager or your financial advisor to create wealth for you.
Why Do You Need a Long Term Strategy for SIP Investment?
As with every other investment option, SIPs too have some downsides, which you need to manage and make your investments aligned to your investment goals.
No mutual fund schemes outperform the market and peers every time
Even the best mutual fund schemes fail to outperform the market and peers every time. There are periods when the fund slips to negative territory or fails to match the returns of the benchmark. The underperformance can be attributed to many factors like weak macros, failing to adjust to the evolving trends in the market, high risk-adjusted portfolio, etc.
Therefore, when making a SIP investment for say- 10 years, 15 years, 20 years or more, you need to review your funds periodically and switch to different plans as and when required.
In long term investment, there is no single best fund that will help you to reach your goal, you need to have a flexible investment strategy. It is very difficult to determine the upcoming trend or how the particular fund will perform in the next decade or two.
In the long term, your SIP will just act as a lump sum investment
SIP helps to build wealth by starting small and with disciplined investing and regular contributions, you accumulate wealth. But, that accumulated wealth will act as a lump sum, thereby losing the significance of your SIPs and stands at a greater risk to market volatility.
Therefore, you need to rebalance your portfolio at regular intervals. For example, as you are near your investment goal, you can transfer your accumulated funds to a low-risk debt fund to reduce the effect of market volatility and generate a steady rate of return. Or, rebalance your equity exposure as per your risk profile.
Do not only look for high-rated funds
Mutual fund investment is not only about investing in 5 star rated funds. The funds which are rated 5 stars now were once single or double stars. These star ratings are quite insignificant in the long term. You should always invest as per your investment objective and risk profile.
For example, HDFC Top 100 Fund (earlier was known as HDFC Top 200 Fund) is one of the best ranked large-cap equity mutual funds. In 2014 and 2015, the fund was underperforming its benchmark index and slipped to the bottom of the charts. Despite the underperformance, the fund managed by well-known fund manager Prashant Jain stuck to its approach of investing in unfashionable stocks, picking stocks for the next market cycle at an attractive valuation. Whereas, other funds continued to buy quality and trending stocks.
The strategy adopted by Prashant Jain paid off despite bringing some initial pain. The fund turned around during the next market cycle and once again climbed the chart to the top.
The same case goes with Axis MF Bluechip Fund, which was one of the worst-performing mutual fund schemes of 2016-17. Unless you have invested in that period, you cannot get the returns you see today. Continuing to invest in bad times helps an investor to grow rapidly.
Investing is all about controlling your greed and fear and the one who controls it would make money from it.