Investments especially if it is a growth-oriented investment like (equity shares) or equity-oriented (mutual funds), it is important to stay invested in the market across market cycles to benefit out of the compounding returns.
I have seen the new-age investors always focusing on timing the next best stock, next best fund etc… rather than giving enough importance to their life goals like (retirement planning, children education, building a corpus etc…)
As the television media, print media and social media platforms always focus more on the new IPO (Initial public offer) and also on the next big thing which attracts headline news, they undermine the importance of asset allocation, life goals and the benefit of staying invested for a longer period.
Retail investors start as investors and end as traders. Understanding Business Cycles is very important to invest in as some cycles can test the best of investors during extreme market conditions. Ex: pharma during 2016-20 and industrials during 2016-20 and the broader market (small-cap companies) 2018-2021. By moving out of these indices during the turbulent period will miss out on the compounding returns which was generated during the recovery phase (during the 2nd half of the financial year 2020-21 and subsequently in 2021-22).
Similarly, while investing in SIP (systematic investment plan) route in equity mutual funds, it is important to give enough time to generate returns as SIP’s are advised only for LONG TERM if the underlying fund is a growth-oriented fund. When the market corrects, the investor gets the benefit of adding more units (cost of the unit is lower) and during an upmarket cycle, NAV will grow which will provide the capital appreciation. Hence, it is imperative to plan for LONG TERM GOALS with SIP investment for higher returns which will help you to beat inflation and end up with a positive REAL RETURN. (Real returns are the ones that will factor the impact of inflation and the positive return which the investor has received).
Power of compounding is the least understood concept and as Albert Einstein said “Power of compounding is the eighth wonder of the world, He who understands it earns it, he who doesn’t pay it”.
Hence, plan your investment based on goals and reap the rewards of compounding!!
