Personal Finance | You cannot make money without a long-term mindset

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Franklin India Prima Fund recently completed 31 years, and HDFC Flexi Cap, 30 years. Over their respective tenures of existence, a monthly systematic investment plan (SIP) of ₹ 10,000 in each fund would have grown to over ₹ 20 crore each.

I have noticed that when these figures are presented in the media, everyone gets upset saying that it is wrong to assume an investor would have ₹ 10,000 to spare three decades ago. Point noted.

But the learning that needs to be reinforced, without getting derailed about the affordability back then, is that you cannot make money in equities without developing a long-term mindset. It is underplayed how the right mindset of equity investors is an asset, especially if cultivated at a very young age. A get-rich-quick mentality will be responsible for your downfall. It will make you chase the latest performers or go for stock tips. Worse, it will make you dabble in Futures and Options (F&O) trades.

If an investor in the above funds panicked during steep drawdowns, he would have either stopped his SIPs or sold. Both terrible mistakes. One of the trump points of an SIP is to pursue the investments during bear markets because you get a huge number of units for lower costs, than in a market run-up. Money is made during this time. As world renowned investor Shelby Davis famously said, “You make most of your money in a bear market, you just don’t realize it at the time.” Stopping the SIP is one aspect. Selling during a downturn further compounds that error. It would be a double whammy because the investor will end up with a loss of capital.

So, even if we go with the statement that very few would have had ₹ 10,000 decades ago, what is stopping you from investing ₹10,000 every month right now, and doing so for the next few decades? Call It your retirement kitty.

Let’s work out the numbers and assume a return of 15 per cent per annum.

• Over 30 years, ₹ 10,000 invested every month, would deliver a corpus of ₹ 7 crore.
• Over 20 years, ₹ 10,000 invested every month, would deliver a corpus of ₹ 1.51 crore.
• Over 10 years, ₹ 10,000 invested every month, would deliver a corpus of ₹ 27.86 lakh.

Can you see the difference in returns between decades? There is no escaping the fact that it is the long-term that makes one wealthy.

But no investor who starts out with SIPs stays at the same amount as the years go by. As income increases, so do investments. If we take two working individuals in the same field, the one in his forties would have higher SIP amounts than one in his twenties.

Now let’s look at an annual step up of 10 per cent.

• Over 30 years, the corpus would be ₹ 15 crore.
• Over 20 years, the corpus would be ₹ 2.78 crore.
• Over 10 years, the corpus would be ₹ 39.57 lakh.

A small increase every year results in a substantial accumulation. If you have an SIP, aim to increase it every year. Some years, you may not have a substantial increase due to change in circumstances. Other years may be quite favourable. Just increase it every year, however small the rise.

Lessons to remember:

• Equities have the potential to deliver superior inflation-adjusted returns over the long term. They are the most favoured asset class for wealth generation and should form a part of an investor’s portfolio. But to accumulate those crores, you just have to have a long-term mentality. Without this mindset, you will never have the patience to endure.
• A long-term mindset goes hand-in-hand with SIPs. It is the patience combined with discipline that is the winner. Because irrespective of market upheavals, the investment continues. Market irrationality can last a very long time – be it exuberance or dismay. By sticking to your SIP, you don’t fall prey emotionally to the prevailing sentiment.
• When it comes to long-term equity investing, SIPs are the best way to invest because of the practicality of it. You would not have huge amounts to invest at one go. This removes the pressure on your finances and enables consistency and discipline. Putting away small amounts every month or quarter actually works well for salaried individuals who have considerable outflows by way of children’s fees, living expenses, and loan payments. The convenience and hassle-free benefits of the money getting deducted automatically from your bank account are unsurpassed.
• There is another benefit too. By circumventing the need for human intervention, you avoid the emotions of fear and uncertainty taking over. Neither do you have the stress of keeping tabs on the market.

Don’t scorn SIPs. Leverage them. And hang on for the long term.

Larissa Fernand writes on personal finance and investing. She focuses on understanding the mindset of investors and their relationship with money. Views are personal and do not represent the stand of this publication.