Why Discipline is the Ultimate Source of Alpha in Investing?

An illustrative tale of two investors

Consider two investors who begin their journey at the same time.

* Note: Returns calculated by taking mean of 10-year rolling returns between 01/06/14 and 31/05/24 (Index values are considered from June 2004 to May 2024) of Nifty 500 (75%) + CRISIL Composite Bond Index (25%): 12.80%.

Disclaimer: Past performance may or may not be sustained in the future and is not a guarantee of any future returns. HDFC AMC/Mutual Fund is not guaranteeing or promising or forecasting any returns. Historical performance indications and financial market scenarios are not reliable indicators of current or future performance.

Annual profits and losses of individual traders in EDS - FY22 to FY25

Note: EDS: Equity Derivatives segment. Source: SEBI Study

The emotional cost of hype driven investing:

• When markets surge, greed kicks in. Investors rush to join the rally. But when the tide turns, fear takes over, triggering panic selling and regret.
• This emotional cycle of buying high and selling low results in poor outcomes and missed goals. This tends to lead to reduced savings / investments, which ultimately reduces overall wealth creation.
• Discipline may not make headlines, helps build something far more powerful: wealth. Lack of discipline is a recipe for the reverse to happen.

The data doesn’t lie

Historical data (see table below) shows that long term SIP investing in equity mutual funds has created healthy returns for investors, offering

• Better long term returns
• Lower volatility
• Greater alignment with income flow and life goals

SIPs encourage financial discipline and create a path to wealth

Source: MFI Explorer. Data taken for investments of Rs 1,000 every month into the Nifty 50 TRI at month-ends from June 2005 till June 2025. Past performance may or may not be sustained in future and is not a guarantee of any future returns.

Conclusion:

SIP as a mode of investment into Mutual Funds have shown a long track record of being wealth creators for investors. While short term strategies may give a dopamine hit, investors may benefit from having a significant portion of their wealth allocated to financial assets that align with their long term goals.

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