Right, so we've empirically proved that SIPs, especially those running for four or more years, do away with the spectre of capital losses. But then, you don't invest in equity funds to avoid losses. You do it to earn a double-digit return. So what are your chances of getting to that 10 per cent annualised return with an SIP?
To assess this, we filtered the SIPs across time periods for a minimum 10 per cent return. Even for investors who ran just one-year SIPs, the odds weren't bad. The investment earned a minimum 10 per cent return in 55.6 per cent of the cases (well over half). Stretch that to 24 months and investors got to that 10 per cent return in a good 57 per cent of the cases. As you stretch the running time of the SIP to four years and more, the chance of a double-digit return rose to 62 per cent or higher. With a ten-year SIP, an investor had a 77 per cent chance of making a more than 10 per cent (see Figure 1).
No wonder then that many seasoned investors who have been investing in equity funds for that long swear by this investment vehicle.
Does all this mean that you can only aspire for a 10 per cent return? Not really, that's the minimum floor we used for the above finding. The number crunching actually shows that the typical SIP delivered a 15-19 per cent return to the investor.
The shortest SIPs (one year) delivered the highest 'average' return, at 19.7 per cent. But then, that's like the famous joke about the seven-foot man drowning in a river with an average depth of six feet! If you landed up with the worst fund over the worst-possible year, you could lose a lot of money with one-year SIPs. A minimum five-year SIP again appeared ideal. It managed an average return of 15.1 per cent and also ensured that even the worst-case show didn't earn you less than a savings-bank return!
This is the third of a 5-part series on the secrets of SIPs.