Staying invested for the long term- A key to wealth creation

Imagine this: You and your friends are heading on a week-long vacation to your favorite destination. You are excited and looking forward to enjoying the next few days with your friends.

But, on the journey, you realize that there is a glitch in your car. In this case, what do you do? Do you cancel your vacation or do you get your car fixed and resume your journey?

Alternatively, let’s say you reach the destination and enjoy your first day of vacation. Now, do you cut short the vacation because you’ve already had a good day or continue to make the most of this entire vacation?

A small hurdle in your journey or an extremely pleasant initial experience does not mean that you cut short your plan. Then, why do we not apply the same logic to our investments as well?

The most important factor that can help you create substantial wealth is staying invested for the long term riding out your investment’s short-term ups and downs.

Think of these short-term ups and downs as enjoying your first day of vacation or your car having a glitch. Dealing with these short-term events will help you reach your destination or in the case of investments, help you create substantial wealth.

So, let’s look at two examples using real data to understand this better.

Example 1:

• Rahul started a monthly SIP of ₹5,000 in an Equity Fund in June 2014 for long-term wealth creation.
• Since the markets were performing well, Rahul got a return of more than 13% in just 6 months and decided to redeem his investments.

But in this process, he missed out on the long-term opportunity and compromised with his investment objective of building wealth. Here’s how:

#Value as of 30th November 2014. The above illustration is for one of the large-cap equity funds. This is shown for illustration purposes only and should not be construed as advice. Past performance may or may not be sustained in the future. The values are rounded off to the nearest hundred. The SIP date is assumed to be the 1st day of every month.

As you can see, in 6 months, Rahul made a profit of ₹4,100 and redeemed his investment. But had he stayed invested, the value of his investment would have been ₹7.19 Lakh — a profit of almost 3 Lakh.

While short-term profits may look very attractive, focusing on the long term goes a long way in achieving your investment objective of wealth creation.

Example 2:

• Ajay started a monthly investment of ₹5,000 in an Equity Fund in June 2011 for long-term wealth creation.
• Since the markets started going down, Ajay incurred a loss of 8% in 6 months. Ajay panicked and decided to redeem his investment.

But due to this decision, Ajay lost a substantial wealth creation opportunity. Here’s how:

#Value as of 30th Nov 2011. The above illustration is for one of the large-cap equity funds. This is shown for illustration purposes only and should not be construed as advice. Past performance may or may not be sustained in the future. The values are rounded off to the nearest hundred. The SIP date is assumed to be the 1st day of every month.

As you can see, had Ajay stayed invested for 10 years as per his goal, he would have created a wealth of ₹14.40 Lakh by investing only ₹6 Lakh — a profit of ₹8.40 Lakh.

If you see short-term losses in your equity fund investment, do not panic. Focus on your long-term goal before taking any decision to redeem.

Here are a few things you should remember while investing in Equity Funds:

• Do not let short-term profit or loss in equity mutual funds distract you from your long-term goals. You will lose an opportunity to create wealth over the long term if you let short-term profits and losses affect you.
• Staying invested for the long term and maintaining the discipline of regular investing is crucial for long-term wealth creation.
• Investing via Monthly SIPs is an ideal way to maintain investment discipline. They help you accumulate substantial wealth over time and mitigate the short-term ups and downs in the market.

Hence, focus on your end goal, start your monthly investments and stay invested. These three simple steps are key to wealth creation.

Mutual Funds are subject to market risk. Please read all scheme related documents carefully before investing.

PhonePe Wealth Broking Private Limited | AMFI — Registered Mutual Fund Distributor ARN- 187821.