Our analysis has pretty much proved that SIPs save you from the consequences of both bad market conditions and poor timing. But the one thing that they don't save you from is poor fund selection.
Having chosen a poorly performing fund for your SIP, stretching the tenure of the SIP because it is underperforming its benchmark or peers will not materially bolster your returns. In fact, sticking faithfully to SIPs in poor performers can entail quite a huge opportunity cost.
Take the multi-cap equity-fund category. No matter what time period you chose for SIPs in Franklin India Prima Plus, a consistent top ranker, it delivered a 24 per cent plus annual return. If one-year SIPs in this fund averaged 29 per cent (this is across market phases), two-year SIPs returned 27 per cent, three-year SIPs 26 per cent and so on. Overall, across different SIP tenures, investors in this fund have averaged a 26 per cent return.
Contrast this with LIC Equity Fund, a bottom ranker in the same category. The fund averaged just 12 per cent across its one-year SIPs, with the IRR (internal rate of return; a tool used to calculate returns for inflows over time) deteriorating to 8 per cent on two-year and three-year SIPs. Overall, SIP investors in this fund, even if they kept on investing for ten years, ended up with an average IRR of just 11 per cent, less than half of what the leading funds managed.
This trend of lagging funds failing to pull up their socks over the long term is evident from other categories as well.
Ten-year SIP investors in Birla Sun Life Tax Relief - a category topper - took home an average 28 per cent return. But ten-year SIPs in L&T Tax Saver and Kotak Tax Saver averaged a 12 and 11 per cent IRR over ten years in the same time span. In the large-cap equity category, HDFC Top 200 has managed to deliver an average return of 24 per cent to investors with ten-year SIP accounts. But IDFC Imperial Equity has averaged just 10 per cent for similarly patient long-term investors.
In all of the above cases, persisting with the long-term SIP on the poor performer would have entailed a large opportunity cost to the investor. For instance, a ten-year SIP in LIC Equity Fund from May 2007 to April 2017 would have seen your investment of Rs 12 lakh grow to just Rs 19.1 lakh, an effective IRR of about 9 per cent. But an identical SIP in Franklin India Prima Plus would have grown the same investment of Rs 12 lakh to Rs 27.9 lakh at a 16.1 per cent IRR. That's a 70 per cent plus appreciation on your investments lost to wrong fund selection. In short, if a fund is unable to deliver reasonable SIP returns relative to peers or benchmark in its first year, being an eternal optimist and persisting with the SIP doesn't make sense.
The lesson from the above findings is that an SIP does not absolve you from carefully monitoring your fund portfolio for performance. It is important to juxtapose your fund's SIP returns with market conditions. You obviously needn't worry about your SIPs being in the red if the stock market has been on a downtrend. After all, that's what you anticipated while starting your SIP.
But if your fund is a lone ranger within its category and has far inferior SIP returns than its peers or benchmark, don't hesitate to discontinue the SIP and switch immediately to a better performer. Funds that underperform benchmarks for two years running or category peers by wide margins over a two-year period are a no-no, whether for SIPs or for lump-sum investment. You can find and compare SIP returns of funds using our SIP Returns tool.
If you adopt a 'fill it, shut it, forget it' approach to your long-running SIPs, any deterioration in fund performance may deal quite a blow to your wealth creation over the long term. This may not be not in terms of making an actual loss on your investment but certainly in terms of an opportunity loss on your hard-earned money.
In fact, because SIPs tend to be auto pilot, there can be a strong temptation to just carry on without assessing your portfolio performance on a regular basis. But to ensure that your SIPs aren't throwing good money after bad, it is essential to review your SIP portfolios every six months or year.
Finally, all said and done, the findings of this analysis are not the main reason for investing through SIPs in mutual funds. The real value of the SIP is not in the maths, but in the way it disciplines investor behaviour. SIPs are the best way of instilling the discipline to save some amount from your monthly income before you splurge. They're also the best tools to take the worry out of equity investing.
As the above numbers prove, SIPs lead you to good returns while putting your investments on auto pilot, without having to constantly worry about whether markets are overvalued or cheap. When the markets fall, psychology and instinct impel many investors to stop investing, either because of fear or because of the mistaken belief that they can re-enter when the market bottoms out. That's a sure way to miss the bus!
SIP investors, on the contrary, tend to persevere during market falls. When the markets rebound, this teaches them the value of patience. All the great returns that find mention in this analysis were generated because our hypothetical investors did not stop investing. The great value of SIPs lies in the fact that they encourage this behaviour.
This is the concluding part of a 5-part series on the secrets of SIPs.