Investing secrets: Four-year SIPs don't disappoint
In 2017, we decided to dig into our 25-year-old data on mutual funds to take stock of the SIP returns given by different equity funds
By Aarati Krishnan | Nov 21, 2018
After giving some serious thought to what we have learnt from studying, analysing and writing on mutual funds over the last two decades, we found some insights on mutual fund investing that seem to hold good for all times. Here's the first one.
Every time the stock market goes through one of its turbulent phases, many new investors are heard complaining about how systematic investment plans (SIPs) have let them down. This time has been no exception. With one-year returns across equity-fund categories turning red, some investors appear deeply disappointed that SIP investing hasn't contained their losses.
Well, the one piece of advice we would like to offer them based on our 25-year stint in this market is to continue with their SIPs and keep faith. SIPs are not a magic wand that can guarantee you a short-term gain if the asset class in which you're investing is experiencing a bear market. But persist long enough with SIPs in good funds and we assure you, you'll not be disappointed!
This is not a mere verbal assurance that we're making here, but a considered piece of advice that is based on some hard-core number-crunching.
In 2017, Value Research decided to dig into its 25-year-old data on mutual funds to take stock of the SIP returns actually experienced by fund investors in diversified equity and aggressive hybrid funds with more than a 10-year history. For every single month starting from their launch date, we simulated SIPs on all possible rolling time periods from one to 10 years. We then calculated the internal rate of return on these 3.67 lakh possible SIP accounts, running from 1992 to 2017 across the 217 schemes.
We found that investors who invested in SIPs for just a year suffered losses in as many as 22.5 per cent of the cases. But as they lengthened the period of the SIP, the incidence of losses fell dramatically. SIPs that lasted two years subjected investors to losses 16.2 per cent of the times. Three-year SIPs suffered losses 9.8 per cent of the time. But four-year SIPs were able to lower the probability of losses to just 6 per cent. These findings essentially tell us that if you run an SIP for four years or more, you had a 94 per cent plus chance of ending up with a positive return.
But what makes four years so special? The explanation could be that bear markets in India have typically lasted for 12 to 24 months. Thus, a three-year SIP allows sufficient time for the market to correct and a four-year SIP allows you to get back into positive territory!
Though capital losses are our biggest worry while investing in equities, our real objective is to beat fixed income and get to at least a 10 per cent return. So, what's a good horizon to get to that goal with an SIP?
Well, the chances aren't very bad even for investors who did SIPs for just one year. They got to a 10 per cent return in 55.4 per cent of the cases. But the probability of a 10 per cent return on an SIP rose steadily as one stretched the time period for the SIP. When investors commit to SIPs for four years, they have a two-thirds chance of making a 10 per cent plus return. But a five-year SIP appeared ideal in terms of the risk-reward ratio. Over the last 25 years, a five-year SIP had managed an average return of 15 per cent and never earned investors less than a savings bank return of 4 per cent.
To read the other stories in this series, click on the links below.