One of the most reliable habits an investor can adopt is regular, automated investing. It removes the burden of guessing when to buy and replaces it with a schedule. A saver who follows the Sensex Index closely may feel tempted to wait for a dip before investing, while someone reading about the Kospi Index in a morning bulletin might worry about foreign weakness. Both reactions can lead to delays that cost more than any short-term fluctuation. Systematic investing offers a calm answer to the question of timing.
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How Systematic Plans Work
In a systematic investment plan, you commit to a certain amount of money that goes into a particular mutual fund regularly. Mostly these are monthly instalments, which allow you to buy more units when the price is low and fewer when it is high. Over a period of time, the average cost per unit works out to be lower than if you had invested a lump sum at one time. However, systematic investing does not help you reap rich rewards if the markets are falling. The whole point is to wean you away from the very human tendency to buy when the market is booming and sell when it is crashing
Psychology
We humans are not very good at timing the market. We feel euphoric when the market rises and despondent when it plummets, so we act irrationally. But with systematic investing, you can take the emotion out of the equation and make it as automatic as paying a bill.
Many investors find that systematic investing helps them most when the markets are down.
If you keep investing regularly, you will end up with more units in a declining market, which means that when the market recovers, you reap the maximum benefits.
How Much and In Which Funds?
You need to pick funds that align with your financial goals and risk appetite. If you are investing for the long term (say, for retirement), go for diversified equity funds, especially index funds, flexi-cap or large-and-mid-cap funds. For shorter terms, hybrid or debt funds are a better bet. Decide what proportion of your income you want to invest; a good rule of thumb is to put aside at least 20% of everything you earn (if possible, invest more). You should invest only after you have an emergency corpus of, say, six months’ salary, and insurance cover in place. You should start with a small amount that you can afford to spare every month, but increase the instalments every year as your income grows.
Some Tips
Invest on a day when you are sure you will get the money in the bank, to avoid missing an instalment. It is a good idea to link the systematic investment plan to your salary account with a mandate that debits the amount directly from your account. Give yourself a break if the markets plunge; instead of quitting, keep going. Do not change funds more often on the whims of market movements. Check the performance of the scheme against its category average once a year. Also, consider choosing a step-up option wherein the instalment amount increases by a certain percentage every year. Even a small increase will add up to a large corpus by the end of your investment tenure. Maintain proper documents related to the systematic investment plan to claim exemptions and benefits while filing taxes. These documents also help keep track of the gains and losses in a particular scheme.
Common Mistakes to Avoid
Do not miss instalments when the market is down. Do not keep stopping and restarting the scheme. Do not invest in too many schemes, because it is difficult to keep track of their performance. Do not get disheartened if your returns are not impressive in the short term. Remember, systematic investing is about patience, and you need to give it at least 5-7 years to show good returns. Always invest with a goal in mind, such as your child’s higher education or a dream house. If you have a goal in mind, it will be easier to stick to your systematic investment plan, even when the markets are down. Systematic investing may not make you a millionaire, but it has made many ordinary Indians crorepatis. The systematic investment plan is the lazy man’s way to wealth. All you have to do is get into the habit of disciplined investing and watch your money grow steadily without the headaches of market timing.
