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For years, mutual fund companies have been trying hard to convince retail invest
ors about the benefits of SIP. Investment advisors, newspapers, personal finance
magazines and even blogs have been doing it for years.
But sadly, despite the Indian mutual fund industry being 22+ years old, only a s
mall section of the retail investor community has benefited in the real sense, f
rom investing in mutual funds.
And this is not a general observation. Its a fact and has also been highlighted b
y a well-respected fund manager from Franklin Templeton, based on the analysis o
f their mutual fund folios after completion of 20 years of Franklin Blue Chip Fu
nd. According to their study, despite the fund delivering consistently high and
market-beating returns, there are hardly any investors who have profited fully f
rom this fund.
The reason for this can be attributed to the fact that most of the times, retail
investors are sold products that dont meet their requirements. The distributors
and agents are only selling products, which give them the highest commissions. A
nd this does not stop at that. These agents and distributors then convince inves
tors, to churn their portfolios continuously to extract more commissions from th
em!
Now there is nothing new or radical that is being said in this post. And you mig
ht have already read similar articles about SIPs on other blogs and personal fin
ance magazines. This post is a reiteration of our strong faith on the power of r
egular investments through Systematic Investing Plan (SIP). We will use fact and
figures to further substantiate this faith.
So let us get into the details now:
For this multi-scenario case study, we have chosen the mutual fund scheme: Frank
lin India Prima Plus Fund Growth.
An amount of Rs 10,000 was invested monthly (via SIP) in this fund starting from
July 2000 (for a 15-Year Period for this case study).
Now we did not attempt to time the markets or try any other complex techniques.
We just focused on doing a plain and simple, monthly SIP of Rs 10,000 for a peri
od of 15 years.
If you want, you can see the entire investment statement by clicking on the smal
l image below:
To summarize, a regular monthly investment of Rs. 10,000/- from July 2000 to Jun
e 2015 (with 1st trading day of the month taken as the SIP day) was done. This a
mounted to an actual investment of Rs 18 lacs.
Now in June 2015, which is after 15 years of starting the SIP, the invested amou
nt of Rs 18 lacs has grown into a corpus of Rs 1.28 crores! Not a small amount c
onsidering that just Rs 10,000 was invested every month. And to put it on record
, we did nothing spectacular. We just did SIP. Thats it.
Rs 10,000 x 180 Months = Rs 1,28,00,000 (!)
Looks crazy? But that is the power of long term investing.
As a retail investor, you dont need to be super intelligent or a financial wizard
to create a big corpus. As Buffett famously said,
Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.
For retail investors, the rule of the game of wealth is simple:
Dont do anything else apart from investing small amount (as much as you can manag
e) every month for long periods.
In our case study, its about investing an amount of Rs 10,000 every month for a p
eriod of 15 Years. Not a very difficult thing to do for quite a few of us. Isnt i
t?
So if its so easy to create wealth through a simple SIP, then why do people cont
inuously talk about equities being risky and complain about losing money by inve
sting in stocks and equity mutual funds?
Are the equity mutual funds really that risky? The answer is a big No. It is not r
isky provided you play by the rules of the game. And to convince the skeptics, l
ets analyze the returns earned by the chosen mutual fund during different period
s.
Since the investment is SIP-based, we calculated the XIRR returns over different
period. In our opinion, 7 years and above is a suitable time frame for investin
g in equity mutual funds.
However we will calculate XIRR (or internal rate of return) for 3 years, 5 Years
, 7 years, 10 years and 15 years.
Rolling 3-Year Returns
Please note that 3 years is not a suitable time period for investing in equity f
unds.
An amount of Rs 10,000 was invested via SIP on 1stof every month for 3 years. So
in 15 years, we get 13 data points on a rolling 3-year basis. The XIRR results
are as follows:
Out of the 13 available data points, not even once were the returns negative. Th
e returns ranged from lows of 4.28% to highs of 48.45%.
9 of the 13 three-year periods gave returns in excess of 18% which is not a smal
l achievement.
4 of the 13 three-year periods gave single digit returns ranging from 4.28% to 8
.32%. No doubt, these figures are low. But there still hasnt been a loss. Now let
s agree to one fact. In short time periods, bull and bear markets can significan
tly distort the returns. Both on the higher, as well as on the lower sides.
So lets carry out similar analysis for longer time-frames.
Rolling 5-Year Returns
Now 5 years is the bare minimum, which one should consider for investing in equi
ty funds.
In this particular scenario, an investment of Rs 10,000 was made via SIP on 1st
of each month in each of the 5-year periods. In a 15-year period, we get 10 data
points on a rolling 5-year basis. The results are as follows:
Once again, not even once did the returns turn negative. i.e. there were no lose
s. In fact, the returns ranged from lows of 8.71% to highs of 49.43%. It is wort
h noting that the minimum returns are quite close to risk-free (and most of the
times taxable) returns provided by PPFs and bank fixed deposits.
7 out of the 10 five-year periods gave returns in excess of 17%. There was just
one single digit return period of 8.71%.
Lets now move further.
Rolling 7-Year Returns
For a 7-year SIP, the return figures are as follows:
The most important thing to observe here is that once again, there are no negati
ve returns periods. And the returns range from lows of 9.54% to highs of 42.52%.
7 out of the 9 available periods gave returns in excess of 16%. The two lowest r
eturns were 9.54% and 11.04%. And both these are well above the returns given by
traditional bank deposits, PPFs, NSCs, etc.
Now lets move to 10-year period now.
Rolling 10-Year Returns
In this, we only get 6 rolling periods of 10 years each. The returns correspondi
ng to each of these periods is given below:
It can be safely said that over a 15-year period, none of the investments (exclu
ding real estate in some specific areas) would have provided such returns. More
importantly, such returns have been achieved by small monthly investments withou
t straining your pocket or cash flows.
Now we know what you must be thinking.
Why was this particular fund chosen?
Or what would have happened had we taken any other fund?
Now as per Value Research, the scheme Franklin India Prima Plus Fund is rated hi
ghly as a 5 Star Fund. It ranks in top 3 in the Large & Midcap Equity Funds cate
gory over a 5-year period. It is also among the top 3 funds over a 10 Year Perio
d. To sum it up, its one of the best performing funds in its category over short,
medium and long term.
So lets admit that we intentionally chose the best and the top rated fund in the
Large & Mid Cap Category for the above study. Hence, all results were bound to
be in our favor. Isnt it?
No worries. Lets change the fund now.
What if we choose a fund that is one of the worst performing funds of its catego
ry?
That will be an interesting analysis.
So we take one of the worst performing funds Sundaram Growth Fund, and repeat ou
r analysis.
As of June 2015, Sundaram Growth Fund has been rated as a 1 Star Fund, and ranke
d in bottom three of the Large & Midcap category over a 5-year period. It is als
o ranked last in all funds over a 10-year period.
So once again, lets analyse the power of SIP using the worst performing fund.
If you want, you can see the entire investment statement by clicking on the smal
l image below:
To summarize, a regular monthly investment of Rs. 10,000/- from July 2000 to Jun
e 2015 was done. This amounted to an actual investment of Rs 18 lacs.
Now in June 2015, which is after 15 years of starting the SIP, the invested amou
nt of Rs 18 lacs had grown into a corpus of Rs 68.42 lacs!
So this has been achieved by a simple SIP in 15 years, when invested in one of t
he worst performing funds.
Comparatively, the best fund created a final corpus of Rs 1.28 crores. The total
investment was same in both the funds, i.e. Rs 18 lacs.
This divergence in returns highlights the importance of choosing the right fund
and monitoring the same regularly for its performance.
Now lets proceed to our XIRR analysis for various time-periods.
Rolling 3-Year Returns
Below is the table giving the rolling 3 year returns in our chosen fund:
So while the best fund delivers returns between 4.28% and 48.45%, the not-so-gre
at fund delivers returns between -0.44% to 47.10%.
Although, the best fund had no negative returns in any of the 3 year investment
periods, this fund gives negative returns in 2 of the 13 data points.
Rolling 5-Year Returns
Out of the 10 data points, not even once the returns were negative. And we are t
alking about one of the worst funds here.
Lets move on to longer periods now.
Rolling 7-Year Returns
The returns in 7-year period range from lows of 4.08% to highs of 37.72%. Compar
e this with the range of returns (9.54% to 42.52%) produced by the best performi
ng fund.
7 out of the 9 data points for the best performing funds gave returns in excess
of 16%. For worst performing fund, only 4 out of the 9 data points provided retu
rns in excess of 16%.
Now 2 out of 9 data points gave returns of 5.52 % and 4.08%. Though theoreticall
y, its not a loss, it is still lower than what could have been earned through saf
er options like FDs, etc. In case of best performing fund, it did beat the fixed
deposit returns even at its worst. So once again, it proves that fund selection
is very important.
Rolling 10-Year Returns
But even though the worst fund does poorly when compared to best one, it is stil
l not a bad performance, when compared to other safer options.
Conclusion
The above analysis shows that for the best fund in its category, there were no l
osses in any of the 3, 5, 7, 10 or 15-year periods. Even the worst performing fu
nd managed to avoid losses in 5, 7, 10 and 15-year periods. Though there were mi
nor losses in few of the 3-year periods.
But we need to remember that anything less than 5 years is not suitable for equi
ty fund investing.
Now a very important point to understand here is that even though the difference
in returns of two funds might not look large (23.5% 16.09% = 7%), over a 15 yea
r period, it can have significant impact on the final corpus as shown in table b
elow:
Why do most investors end up losing money or not getting decent returns from SIP
s?
They do not follow the main rule of the game, i.e. keep investing an amount X ev
ery month for a period of 10 or more years.
They try to time their entries and exits in markets instead of focusing on stayi
ng invested.
Once again, have a look at the complete investment tables for the 2 funds used i
n this analysis. Except for the initial years (up to 2 years), there was no time
when the folio had come into a loss. Even during the 2008-2009 crisis, if one h
ad been a regular investor, the high returns might have been lost, but the value
of folio would still have been very decent in comparison to the money invested.
What if I had entered the markets during the peak of 2008? I would have lost my
money. Isnt it?
On 1st January 2008, the NAV of Franklin India Prima Plus Fund was Rs 212. After
the crash, the NAV was down to nearly Rs 98 by March 2009 (a fall of more than
50%). But it returned to Rs 220 by September 2010. So even though your folio was
down in 2009, it must have been back to its original level by 2010. In addition
, your regular SIP during 2009 would have allowed you to purchase units at cheap
er NAVs, which would have given phenomenal returns by the end of 2010. Hence at
a portfolio level, you would have done well.
You can check the rolling 3-year returns table in the post above (for Franklin I
ndia Prima Plus Fund). The returns are almost 19% to 21% for the periods between
2007-2010 and 2008-2011. So there would have been no loss even if you had enter
ed at the 2008-peak and kept on investing as a regular dumb systematic investor.
I did not get the high returns from markets that people regularly talk about.
The market may or may not give high returns in the short term (spanning 1, 2 or
3 years). But there is data to prove that if one stays invested for periods of 5
, 7 or 10 years in good mutual funds, returns easily beat those of traditional o
ptions like bank FDs.