The Mint-Crisil Research SIP study: the right tenure for your investment

Many of us invest in mutual funds through systematic investment plans (SIPs), but how many of us invest for the long term? And what is long-term really? For the last couple of years, the Indian mutual funds industry has collectively started advocating SIPs. Sceptics even doubted if SIPs work. 

In April 2016, Mint partnered with Hexagon Wealth, a Bengaluru-based boutique wealth management firm, to check if SIPs work at all.

We had taken three time periods; 5 years, 7 years and 10 years. Using a set of 15 equity mutual fund schemes, the study had set out to see how many schemes gave negative returns, returns up to 6%, between 6-15% and greater than 15%.

Further, the study also showed the percentage of times funds gave returns in excess of inflation. The study demonstrated the merits of long-term investment. See it here: bit.ly/2lvDJOx.

This year, we decided to dig a little deeper. We wanted to find out how long should you invest in an SIP.

To say ‘long-term’ is good, but what is long-term really? Is it 5, 6, 7.5 years, or more? If you had invested in any of these time periods, would you have never lost any money in an SIP? 

Flip it the other way. What would you have lost—and how much would you have gained—had you invested for shorter time periods like, say, 1 or 3 years? More importantly, is there a magical period for—and beyond— which if you invest, you won’t ever lose money? 

Mint partnered with Crisil Research—an independent integrated research house —to do a study on SIPs to determine how your chances of making losses go down as your SIP tenure increases. 

We took time periods of 1 year, 1.5 years, 2 years, 2.5 years and so on; till a maximum time period of 10 years. We assumed a starting period of all the SIPs at 1 July 2002. Why this date? We wanted to ensure we got enough data points for tenures as low as 1-2 years to as high as 8-10 years. Besides, to get a good average, we need more data points. 

For a 10-year SIP, for instance, going back to 1 July 2002 gave us 61 data points (10-year SIPs) per mutual fund scheme. The total period of analysis was between 1 July 2002 and 30 June 2017. 

The SIP frequency was monthly. Consider a 1-year SIP for UTI MNC Fund. The first such SIP was done on 1 July 2002 and redeemed on 1 July 2003, the next 1-year SIP was done on 1 August 2002 and redeemed on 1 August 2003; so on and so forth.

A total of 169 such SIP investments were calculated for this and the other schemes for a 1-year period of investment.

We took a total of 54 mutual fund schemes—all equity and only large-caps, mid-caps and tax-savings equity funds.

Since the start date for all our SIPs was July 2002, we only considered funds that were in existence on 1 July 2002.

That’s why many prominent fund houses that were launched later, such as Mirae Asset Global Investments (India) Ltd, Motilal Oswal Asset Management Co. Ltd, Quantum Asset Management Co. Ltd and so on got left out. 

Here’s what the study threw up. And if you invest in mutual funds through SIPs, then these are some solid ways to maximise your wealth:

• The shorter the time period, the probability of negative returns are higher. As per the study, the probability of negative returns of 1-year SIP returns, 2-year SIP returns, 3-year SIP returns and 4-year returns were 21.6%, 15.4%, 9% and 6.1% respectively. But the probability of 5-year, 6-year, 7-year and 8-year SIP returns were 3.6%, 1.4%, 0.5% and 0.1%, respectively.

• The volatility of returns is high for shorter SIP tenures, as compared to long tenures. A 2-year SIP in Taurus Discovery Fund (TDF) between 1 December 2006 and 1 December

2008 gave a negative return (it lost money) of 66% (the scheme’s worst showing in 2-year SIP tenures). A 2-year SIP in the same fund between 1 September 2003 and 1 September 2005 would have given you 88.36% returns (it’s best showing).

The study further shows that the volatility goes down as duration increases. Expressed in a statistic called standard deviation (it measures how far the results are from the middle point), the number drops as the SIP tenure goes up. A 10-year SIP in TDF that began on 3 May 2007 returned 16.47% (its best showing). A 10-year SIP in the same fund that started on 1 September 2003 had returned 2.6% (its worst showing). 

• Is there a magical time period for—and beyond—which if you do an SIP for, and you don’t ever lose money? There is no guarantee since we can’t predict future returns. But as per our study—and strictly based on past data—this period is 9 years.

In our study, none of our funds gave any negative returns over a 9-year SIP time period.

Remember, this set of funds was limited. There were many fund houses and schemes that got launched after 1 July 2002, the starting date of our study.

Also, with the passage of time, this 9-year no-loss period could go down to 8 years or go up to 10 years or more. 

The important thing to remember is to understand how the probability of negative returns drop as your tenures goes up.