Power of consistency in mutual fund investments

8 August, 2024

Synopsis

• Consistency is key to achieving long-term investment objectives through mutual funds.  

• Systematic investment plans (SIPs) help investors benefit from rupee cost averaging and the power of compounding by investing regularly.  

• Inconsistent investing can lead to higher average costs and missed opportunities to capitalise on market volatility.  

• Remaining consistent in mutual fund investments through lump sums or SIPs is essential to maximising returns and reaching financial objectives over time. 
  
  

Rome wasn’t built in the day! You can’t create wealth in a day, too! Wealth creation requires regular baby steps consistently over time. Consistency, not intensity, is what matters, and time adds value to your consistent efforts. The eagerness to accumulate money quickly pushes us to work intensely, which introduces inconsistency. You may ask how intensity can prevent wealth creation.

Let’s understand with the example of a weight loss regimen. Your trainer has suggested working out for 1 hour daily for 6 months. But you want to achieve a weight loss target in one month, so you start working out for 6 hours daily. After a week, you feel exhausted, weak, and demotivated and stop working out. Your weight loss plan has gone for a toss.

Similarly, when you try to achieve your targeted corpus quickly by investing a large sum of money, you will soon realise your monthly budget has gone haywire and eventually decide to quit investing in frustration. Like in other aspects of life, the moral of the hare and tortoise story applies to investing also – Slow and steady wins the race! This answers a question that millions of investors ask – Why is consistency important in investing?

So here’s why consistency is important in mutual funds?

Mutual funds are part of the investing space. Thus, consistency is integral to mutual fund investments, too. Let us recall the fundamental pillars of mutual funds that help investors earn handsome gains. These are rupee cost averaging and power of compounding. And to take advantage of these two aspects, an investor has to be consistent. Let us understand this with an example.

Rupee Cost Averaging: Investing regularly through a Systematic Investment Plan (SIP) can significantly affect the overall cost and returns. Let's compare two investors, A and B, to understand this better.

Scenario:

• Both investors commit to a monthly SIP of ₹600 in the same mutual fund scheme.

• Investor A is disciplined and invests every month.

• Investor B is inconsistent and skips some months.
  
  

At the end of six months:

• Investor A: Invested ₹3,600 and acquired 300 units.

• Investor B: Invested ₹2,400 and acquired 160 units.

Average Cost Per Unit:

• Investor A: ₹3,600 / 300 units = ₹12 per unit

• Investor B: ₹2,400 / 160 units = ₹15 per unit

Investor B paid ₹3 more per unit due to inconsistency.

Power of Compounding: Consistency in investments not only reduces the average cost per unit but also leverages the power of compounding, leading to significantly higher returns over time. For example:

Assumption: The mutual fund scheme provides an annual return of 10%.

In the first year:

• Investor A: Invests ₹7,200 and gains ₹720, totalling ₹7,920.

• Investor B: Invests ₹6,000 and gains ₹600, totalling ₹6,600.
  
  

Over ten years, the difference in returns becomes substantial. Investor A benefits from the power of compounding, resulting in significantly higher returns compared to Investor B, who missed some SIPs.

Examples above illustrate why consistency is important in mutual funds! However, these are only some reasons you should be consistent in investment.

Let us look at how the power of consistency helps investors maximise their gains in more than one way.

Gaining from Volatility: When the market falls, inconsistent investors sell in fear and lose out when the market rises after the fall. On the other hand, consistent investors continue to invest in falling markets and realise handsome gains when the market rises. Similarly, an inconsistent investor would sell and realise short-term gains in a rising market. Consistent investors would forego such term gains and keep investing in adding return on return for handsome gains over the long term. Thus, consistency also helps investors gain from volatility by avoiding panic reactions and herd mentality.

Relief from the Pain of Market Timing: Buying at low levels and selling at high levels is what every investor wants to do. But leave alone the common investors; the best professionals are at sea at the ‘right level’. The only way to counter the market timing dilemma is to remain invested over a long period. That’s what you gain from consistency.

Consistent steps are the best way to maximise gains and move closer to your objectives. You may not see the gains from a disciplined, regular, consistent approach today, but a consistent investing approach will yield handsome returns over the long term. Consistency is far more powerful than intensity in investing, especially in mutual funds. Consistency not only helps you tide over market timing dilemmas but also helps you exploit the full potential of the power of compounding and rupee cost averaging.

If you think consistency is an uphill task, download the HDFC Bank SmartWealth App - The app automatically inculcates discipline and consistency in you!

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