Stay Invested, Don’t Panic
Systematic Investment Plan or SIP is a wealth creation tool that allows investors to invest a predetermined amount on a regular basis in a mutual fund scheme. Lets discuss the biggest advantage of SIP through a behaviour finance perspective.
Biggest Advantage of SIP|Behaviour Finance Angle
Case Study of Dr.Anil – A Backgroud View
- In this article, we are going to discuss a case and will try to explain the biggest advantage of SIP from a benaviour finance perspetive.
- Dr.Anil, who is a heart-surgeon, is investing through SIPs since last 3 years. ANd after 3 years of SIP investments, he is quite disappointed with the performance of his SIPs.
- As a first-time investor, he was not suggested to invest aggressively in Small cap and Mid cap funds. So, he has done his SIPs specifically in Balanced funds and Large cap funds. Although Dr.Anil’s financial goals were long-term goals realising in 10, 15, 20 years, he has chosen SIPs investments in typically Balanced and Large Cap funds being a first-time investor.
- Thus, with the above investment scenario of Dr.Anil, he was very disappointed because of not getting the expected returns from his investments in last 3 years. Obviously, he was confused and thinking about discontinuing his all current SIPs.
- After studying Dr.Anil case, we got to know that his main focus was merely on “Return on Investment”. And he has not at all considered the “Return on Net worth”.
What is Return on Net Worth?
- Net worth is basically a measure of your personal finance health. Net worth number shows where you stand financially. It is defined as the total of your assets (everything you own) minus your liabilities (everything you owe).
- While calculating Dr.Anil’s Net Worth, we have followed a predefined financial planning process. Post Tax income of Dr.Anil for last 2-3 years was about Rs.2-2.5 Lakh per month. And his monthly household expenses, lifestyle expenses etc contribute to his total monthly expenses of around Rs.60,000-Rs.70,000. Thus, inspite of having monthly surplus of Rs.1.3 Lakh since last 2-3 years, Dr.Anil had done total monthly SIPs of Rs.50,000 only. So, where did the remaining monthly surplus funds of almost Rs.80,000 gone? May be in short-term savings, lending to other, LIC policy and other random expenses etc.
- The current value of his SIPs of Rs.50,000 over 3 years would be around Rs.18.5-19 Lakh, just because of fluctuating market sentiments and market valuations.
- From the above case, we can understand that athough Dr.Anil was quite disappointed with his SIP performance over last 3 years, the biggest advantage he had enjoyed from his SIPs is – the Accumulation of Assets.
- Creation of wealth is the primary and foremost step in order to grow or enhace that wealth. Where does this asset accumulation will be accounted in Dr.Anil’s portfolio?
- Obviously, with the accumulated assets, his Net worth is going to increase hand-in-hand.
Importance of Financial Planning Approach
- From the above case, in short, Dr.Anil has forgot to accumulation of wealth properly through financial planning process. Thus, the remaining Rs.80,000 of monthly surplus funds of Dr.Anil remained unaccounted because of not including them into his SIPs as per his financial goals.
- Out of this missed total corpus of Rs.28.8 Lakh (Rs.80,000*12*3) over 3 years, he is having short-term FDs, LIC policy of Rs.6-7 Lakh. Still a large portion of this corpus (almost Rs.21 Lakh) remained unaccounted.
- Thus, we can say it was an opportunity loss for Dr.Anil. If he would have followed proper financial planning process for his financial goals, then this extra unaccounted surplus would have been invested through SIPs.
- Thus, accumulating wealth and tracking of his financial goals would be easier. It would have been definitely help him to accumulate the wealth/assets over the horizon of 3 years. In turn it would result in early fulfillment of his required corpus for his goals or investing this surplus funds more aggressively by executing strategic approach.
Biggest Advantage of SIP through a Behaviour Finance Angle
- One’s routine behaviour is driven – mostly by the habit. As far as personal finance is concerned, Savings and investments also fit right into the framework of pattern of behaviour.
- The value of investing through systematic investment plans (SIPs) is as much about psychology as about the arithmetic of investing. The conventional, numbers-driven logic for SIPs is the main thing that encourages investors to start investing. It’s the habit-inducing nature of SIPs that keeps them investing.
- If we put this in the context of exactly why SIPs are the superior form of investing in mutual funds, we will come to an inevitable conclusion. It’s the psychological factor that is the real driver for the investing returns and success.
- The biggest problem in investing is not where to invest but to keep investing through thick and thin. People invest at irregular intervals and then stop investing when equity markets fall.
- SIPs do the job because investing becomes a habit. It gets ingrained in your behaviour patterns, it happens automatically every month and you don’t have to overcome any inertia to invest every month.