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Mutual Fund SIPs are better than timing the stock market
Given India's economic growth rate, we are in for a long-term structural growth story. Our nominal GDP growth rate is expected to be 15%, with good companies doing better than this rate. Since stock price align with a company's value over the long term, we may expect the same growth in markets too.
In such a set up, for an investor, after ensuring adequate risk coverage, an emergency fund and setting aside money for near- and medium-term needs, equities would be the best way to build your assets. Investing regularly for the long term, in a portfolio of stocks, mutual funds and/or indices, is the most suitable way to benefit from this growth story.
Dalbar studies in the US have pointed out how investors' returns are much worse than overall investment returns precisely because investors try to time the market and mostly end up doing it wrongly. In stock markets alone, we have the peculiar tendency to buy when prices are high and sell when prices are low. Auto pilot investing, as long as a fund keeps doing well, would ensure that the investors get investments' return and there is no gap between the two, unlike when we are not disciplined.
Between 1982 and 2011, sensex's annualized return was 16.75%. If you had invested at sensex's lowest level every year, your annualized returns would be 17.4%. On the other hand, if someone timed the market absolutely wrongly and invested at sensex's the highest level every year, he would have made an annualized return of 16%. Coming to sensible investors, who have invested a fixed sum every month, would have ended up with annualized returns of 16.7%. Ultimately, the difference between the disciplined investor and an excellent (non-existent) market timer is only 0.68%.
A decade ago, the earnings for sensex companies was Rs 200, compared to about Rs 1,300 this year. Assuming a trading multiple of 15, sensex level of 3,000 a decade ago is same as the level of 19,500 this year. The valuations remain the same but the earnings of sensex companies growth would have resulted in 6.5 times growth in the index over a decade.
This decade is expected to be a golden decade for equity investing in India. We are in the right place at the right time. Now to reap the benefits, all we need in our portfolio is a blend of income, time and discipline. We've income and time, which are almost a given, all that we need to instill is discipline: The discipline of making regular investments by completely ignoring the market noises.
To quote investment management great John Bogle, the founder of Vanguard group, "Stay the course. No matter what happens, stick to your program. I've said 'stay the course' a thousand times, and I meant it every time. It is the most important single piece of investment wisdom I can give to you."
Happy Investing!!
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