SIPs: Invest In Equities To Build Long-Term Wealth

The current equity market bull-run is almost as old as the government in power. Like any other bull run, this one too has introduced a new set of retail investors to equities. But there is a slight difference from earlier times.

How to make investors stay invested

While these numbers are good to see, the challenge is how do we ensure new investors continue to stay invested even when markets turn volatile? We have already seen a small glimpse of this volatility in the past few months with average one-year SIP returns of multi-cap funds at (-) 5.6%. 

We must remember that most first time investors have an assured returns mindset and they have chosen equity mutual funds for the lure of the higher returns they offer. Hence, when they see returns receding or turning negative, they turn nervous and look for an exit.

 For example, the markets had seen a major correction in 2008 when the Sensex had fallen from 21,000 levels to 8,000 levels in a short period. This is what I call a price correction. However, if you observe the period after this, the Sensex took almost five years to touch 20,000 levels again. This is a time correction.

While there were many investors who may have exited during the price correction, a much bigger number would have exited during the time correction. Both these events are periods of extreme market volatility which is where investor behavior is tested the most. The challenge for investors, therefore, is to be resilient and stay invested across price corrections and time corrections to create wealth.

While one-year SIP returns are negative for multi-cap funds, investing over longer time frames helps to create wealth. This is not the first time we have seen negative returns in the short term. The one-year SIP returns for the period ended February 2011 were negative but those who stayed resilient and continued their SIPs benefited.