.jpg?downsize=773:435 "#BQMutualFundShow: How To Make Stock Market Volatility Your Best Friend")
A systematic investment plan works wonders in a volatile market, and when held over the long term, can create wealth for any investor, said mutual fund expert Vijai Mantri.
“In some funds, a Rs 10,000 SIP has created a corpus of more than Rs 6 crore” thanks to the power of compounding, he said on BloombergQuint's weekly series, the Mutual Fund Show. Compounding makes a sum grow at a faster rate than simple interest, because in addition to earning returns on the money you invest, you also earn returns on those returns over time.
According to Mantri, the minimum investment horizon for an SIP is seven years.
Here are edited excerpts from the conversation.
Simple changes in investment behaviour can lead to astronomical differences. Your thoughts..
That's right. We take SIP as a product for granted. It brings discipline. It brings system in investing. But a lot of people don't know the mathematics behind it or how it works. That's why it is known as the eighth wonder of the world. It's very simple thing to do. Buy more when the prices are low and buy less when the prices are high. To illustrate, if the price of gold is Rs 4,000 and you are buying 10 grams, you are investing Rs 4,000. When the price is Rs 29,000, you are investing Rs 29,000. So, if you buy a fixed quantity of gold or you can take the illustration of a fixed quantity of shares. If I buy a fixed amount, say, I buy X shares of one company a month, instead of doing that you say I will buy a fix amount. When you do that when the prices are lower you buy a higher quantity. When the prices are higher you buy a lesser quantity. This happens automatically in an SIP and that's the reason an SIP generates huge wealth for an investor. We have mutual fund data for the last 20 years plus.
So instead of opening a fixed deposit, just start an SIP and this magic of compounding or low-cost averaging takes care of the returns?
Absolutely. All of us know that theoretically it will deliver the best possible performance over a longer period of time. So, if you hold equity for a longer period, you get a large amount of wealth. But the journey is not very peaceful, it is volatile. But SIP makes volatility work for you when you are not aware of it.
Is there any study that an SIP of a particular tenure could be more beneficial than the others or just do an SIP, whatever the frequency may be?
The longer, the better. That's what we keep saying. Whenever we think of doing an SIP, the investment horizon is a minimum seven years. In a seven-year period, whenever the market goes down – you should pray for the market to go down if you are an SIP investor because at that time you will buy more units. That particular moment will be really painful when you will see NAVs going down, your portfolio value going down. But you have to think that when you get a bad price, you are getting a large number of units and more value. There is no better explanation of the price and value relationship than this. When the price is bad, you are getting better value. In a volatile market condition, an SIP works wonders for you. And the longer you go, you make the power of compounding work in your favour. So, if you have a 20-year horizon and have invested for 10-20 years...people open recurring deposits, people make investments in real estate and they invest in gold but if they invest the same kind of money in equities then the kind of wealth that they have created is unbelievable.
How does a Systematic Transfer Plan work and what kind of investors would benefit from it?
SIP is basically you planning to invest in future cash flows. You don't have cash flow right now but you are confident that on a regular basis you will get that kind of cash flow. So you plan for that investment in advance.
The second alternate is that you have a large sum of money available to you which you would like to invest. That is called the lupsum investing or one time investing. STP works well when you get a chunk of money, a bonus for example. Say, you have a large pool of money available to you, you park that money in a debt fund or a low-risk fund like a liquid fund or an ultra short-term fund and from there you transfer a fixed amount at a fixed interval. That transfer can happen every week or every 15 days or every month or every quarter. So you have a large sum of money but you don't want to expose that sum of money to the market at that particular moment. So, you put that money into a debt fund and keep transferring the money. Someone can take a call saying, ‘let the money be with me and then I can invest whenever I feel like it'. It doesn't happen because the moment money lies in a bank account or savings account, either you end up spending the money or even if you don't spend it, you see market levels and you get worried. Last year we did, and the market was down. But the mood was not very good. Anybody who invested on that day would have had 3-4 percent returns in absolute terms. But people don't take those kinds of decisions at that particular moment. So STP helps you remove your mood swings and let automatic investing work for you in the long term.
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