Home / Money / Calculators /  Don’t gulp. Go with the SIPpers

Rajesh Bhardwaj knows a thing or two about losing money. In 1983, at the age of 22, Bhardwaj, a former army man was posted in Dras, in the Kargil district of Ladakh. A doctor who served in the Indian Army for 15 years, he remembers the winter that year was one of the coldest ever in that region and the temperature had touched -39 degrees Celsius. But that’s not the only reason he remembers that winter for. One of his seniors walked into the officers’ mess one evening and handed him an application form for an initial public offering (IPO) of a company called ‘United Leasing and Housing’. The senior convinced him that the company would give good returns. The IPO was priced at 10 and he applied for 100 shares. His monthly income then was 4,800. “After that, I never heard of that company nor saw my money," he said, jokingly admitting that he still has the share certificate. After that initial mistake, it took 15 years for Bhardwaj’s investment plans to take shape, learning as he did from a real estate investment in the interim that wasn’t as liquid as he expected. Today, Bhardwaj is a sorted, savvy investor who regularly saves money by investing in mutual funds (MFs) through systematic investment plans (SIPs). His portfolio of 13-14 years has given 11.5-12% returns on an annual compounded basis.

Sunil Kamdar, 53, is based in Rajkot. He started investing in 2005 when equity markets had begun to rise. He didn’t have a plan as to why he wanted to invest, but he just wanted to “test the waters". Apart from having an MF distributor to guide him, he started reading magazines and financial dailies to understand more about investing. He understood that an SIP was the ideal vehicle for the average retail investor with monthly surpluses. By the time his knowledge grew, it was 2008 and equity markets crashed on the back of a global credit crisis. “But I continued my SIPs, because by then, I had realised the importance of investing regularly. And that in falling markets, we get more units," he said. His portfolio of eight years (lump sum plus SIP) gives an annual average return of about 10%. “If I get 12-14% returns in 20 years, I will be happy," said Kamdar.

Two different routes: one painful, the other of curiosity. Same destination: wealth creation. Same path: SIP.

What is an SIP?

An SIP is a facility that allows you to invest in an MF scheme at periodic intervals, mostly monthly or quarterly. All fund houses offer these, on equity and debt funds.

Alternatively, you can also put a lump sum amount in a liquid or short-term debt fund and then transfer to an equity fund through a systematic transfer plan (STP).

In an SIP, you can either specify the tenure for which you want the money transfer to take place. Or, you can start a perpetual SIP; it goes on till you stop it. An STP works differently. Since your lump sum will get exhausted, you need to specify the time frame within which the money should be transferred.

When markets, and therefore, net asset values (NAVs), fall, you get more units, and vice versa.

Smart investors: Rajesh Bhardwaj, Lakshmi Srikar and Nikunj Nandu (left to right) are long time investors who have different goals and methods, but the same route, systematic investment plan, or SIP. Photos by Pradeep Gaur, Nathan G and Abhijit Bhatlekar/Mint
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Smart investors: Rajesh Bhardwaj, Lakshmi Srikar and Nikunj Nandu (left to right) are long time investors who have different goals and methods, but the same route, systematic investment plan, or SIP. Photos by Pradeep Gaur, Nathan G and Abhijit Bhatlekar/Mint

Looking for returns

When the equity market is as volatile as it has been since 2008, or worse, falls continuously, it’s common to doubt the merits of equity investing. The logic of putting in more money in a losing game through an SIP also comes into question. So do SIPs really work? Mint worked on a study with Hexagon Wealth, a Bengaluru-based boutique wealth management firm, to check returns that SIPs have delivered over 5-year, 7-year and 10-year periods. Equity investments are suggested for periods of at least five years; the longer the better.

Of the 38 schemes in existence on 1 January 2000, 15 diversified equity schemes were selected. (Read more in Do SIPs really work for you? on page 15). Rolling returns were considered as this would take into account several time periods and the multiple times that different investors enter and exit an MF investment.

We divided returns into four categories; negative returns; up to 6% (average inflation in past 15 years has been around 6%); 6-15%; and in excess of 15%. Financial planners say that an average return of 12-15% a year can be expected from equity MFs. Here’s what we found.

Over a 5-year period, eight schemes beat inflation at least 90% of the times. In a seven-year period, the figure is 10 schemes. If the SIP period goes up to 10 years, then all funds beat inflation at least 96% of the times. In fact, 12 of the 15 schemes beat inflation at all times.

But there is a small caveat here. We considered the Wholesale Price Index for inflation and not the Consumer Price Index (CPI), which would be higher, because CPI data for that long back is not available.

In terms of returns, if the holding period is five years, SIPs have delivered less than 6% only about 10% of the times, on average. But for a period of 10 years, only three schemes delivered less than 6% (that too, only 3-7% of the times).

“Even the worst performing fund in the group has managed to deliver an SIP return to preserve purchasing power, given a 10-year horizon. But this may be more because of sheer economic growth and in spite of mismanagement. So, for passive investors, with an adviser by the side, the fund selection can be refined to add alpha to the portfolio", said Srikanth Bhagavat, managing director, Hexagon Capital Advisors Pvt. Ltd, which runs Hexagon Wealth. Actively managed funds have been able to outperform index funds despite higher costs, he added. “Many studies citing the in-efficacy of SIPs are based on the Sensex," he said.

The point to note here is that return trajectory has come over the years.

SIP is not magic

SIPs may give you good returns if you stay invested for longer, but it’s not a magic formula. According to our study, if an investor had started her SIP anytime during January 2000 to mid-2003 for five years, chances are she would have got returns in excess of 50%, compounded annually.

But if you would have started an SIP for any five-year period between 2006 and 2009, your returns would have been muted comparatively 8-14% on an average, compounded annually.

“But you have to be careful about fund selection. It can happen that a fund is a top performer at the time you invest, but drops a few years later. Change will be warranted if others in the peer group are doing better over an extended period", said Bhagavat.

Kamdar said he stopped SIPs in HDFC Top 200 and HDFC Equity Fund, as these are going through stressful times.

Is buying an SIP enough?

Experts suggest that merely starting an SIP is not a sure shot way to create wealth. “You need to be in the right scheme. There are many funds that have not done well over even a 5-year period. Diversification among fund managers is necessary. You can’t just blindly start an SIP in any fund and expect it to make money," said Shyam Sekhar, founder, ithought, a Chennai-based MF advisory firm.

SIP is a tool to invest regularly in equity and debt markets. But how your SIPs do will eventually depend on your choice of schemes and also how markets behave. In the long run, though, the impact of market behaviour reduces.

Some planners also suggest that in addition to putting away money systematically, one should invest lumpsums as well.

Although timing the market is not recommended, some bit of careful planning can work to your advantage. IDFC Asset Management Co. Ltd recently came out with an ad that talked about how one should invest depending on whether the markets are cheap or expensive. It stressed on SIPs when markets are expensive and lumpsums when they are cheap. It plotted the market’s price-to-equity (P-E) ratio. This ratio indicates if an equity market is overvalued or undervalued. Higher the P-E, more the markets are considered overvalued, and lower will be funds’ equity allocation.

But can investors ascertain when markets are cheap or expensive? “Why not?" said Sekhar. “Gloom and doom are not difficult to detect. In bad markets, companies come out with all the bad news in one go, and indices see strong downward spikes due to bundled selling," he added.

Deepak Shenoy, who runs Capital Mind, a financial market analytics company, said, “If your income goes up, continuing with a plain-vanilla SIP doesn’t make sense. Top it up; commit more, every month."

Mumbai-based Nikunj Nandu, 33, started his first SIP with 2,000 every month in 2006 after he got his first job. His monthly salary then was 4,000. “I thought I could start with 2,000 and cut down a bit on spending," said Nandu. As his salary went up, so did his SIP amounts. Today, he invests 17,000 a month in seven MFs through SIPs. “My son’s education is important; so no compromises there," he said. Nandu wants to send his son (who is two-and-a-half years old now) abroad for further education. A post-graduation course in Australia costs about 50 lakh now, he said, but “20 years down the line, this could go up to 2 crore; who knows." His about 10-year-old portfolio has given an average annual return of about 12%.

Good advice

Today, both Nandu and Kamdar are confident of investing on their own. So, is a distributor’s help needed after so many years into SIPs? Shouldn’t one move to a direct plan, and save on expenses?

“A distributor’s role is minimal after a point in time. Once she selects the fund for us, our SIP starts," said Nandu. Kamdar said he can pick funds on his own but insists on investing through regular plans too. “In my initial years, my distributor helped me a lot because of which I got into good MF schemes. I am fine if he still continues to earn trail fees out of my SIP investments," said Kamdar.

Chennai-based Lakshmi Srikar, 39, started SIPs in 2007, but still consults her financial adviser, since her job at Cognizant Technology Solutions Corp. keeps her busy. “I can’t track markets regularly. He monitors my withdrawals and ensures I don’t unnecessarily withdraw," she said.

Mint Money take

Over the years, SIP returns have reduced, but this is still a good tool to channelise money into equity markets. You can do an SIP in a debt fund also, but that’s another story.

What you must remember is that SIP is a tool. It’s not a formula to maximise returns. You still need to choose your MF scheme with care, take an adviser’s help if needed while investing, review the portfolio regularly, and switch schemes when needed.

An SIP will help you channelise monthly savings into equity markets automatically, so that brings discipline.

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