Systematic investment plan are a great way of wealth creation since they are subject to the power of compounding
We as humans have emotions. However, it is not a good sign to be emotional when it comes to taking investment decisions.
But the historical data is a proof that we always tend to do so, even though it is not in the best of our interests. For instance, ‘Buy Low and Sell High’ is the thumb rule of equity investments and yet the data clearly portrays we buy into equities when the market euphoria is enthusiastically very high and the indices trade at high levels, thinking it is just going to go up from here. On the other hand, when the indices turn red, we immediately sell panicking that things may get only worse from here. As a consequence, we always tend to make returns lesser than the ones who do not let emotions cloud their discipline.
Discipline comes in investments with our stringent attitude of sticking to our financial goals rather than letting emotions take a toll of our decision. To inculcate discipline, we need to let go of our behavioral biases that makes us move in a herd while investing. In the long term, the lag caused due to our herd mentality dilutes our returns on investments.
To further substantiate the fact, having a look at the above graph clearly indicates that net flows in equity markets have more or less always followed the market movements, as a consequence to which the returns have suffered.
Any decision of investing should be backed by a sound financial plan that caters to all of your financial goals. Investment strategies are guided by how much money you need and by what time do you need it. Systematic investment plan are a great way of wealth creation since they are subject to the power of compounding. Also, they serve as a disciplined mechanism for averaging the cost of investments as risk of timing the market is also averted. However, choosing the right scheme (debt, equity, balanced, others) and the right amount for the systematic investment plan will again depend upon your goals and risk profile. It is therefore always better to seek a financial advisor who can assist you with such decisions.
The writer is founder and CEO, TBNG Capital Advisers
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