What if we took the 10-year lump sum returns of several equity funds and plotted them against their corresponding 10-year SIP returns? What could we possibly learn from such a comparison. If you are are interested to find out, read on.
Just to be clear, this is not about, 'which is better: lump sum or SIP?'. I am not interested in answering meaningless questions. If I had a lump sum and can afford to invest it for a long-term goal, I will invest it either in one go or 2/3 installments. I will supplement that with periodic monthly investing if I can help it. If I did not have a lump sum, I will not bother asking the above question. As simple as that. If you are interested to read more, check out, How to invest a lump sum in an equity mutual fund?
To be frank, I had no specific aim except that I wanted to do a couple of posts on 'do not get married to your SIPs'. I just wanted to compare said returns and see what comes out.
10-year Lump sum vs 10-year SIP returns
The large-cap, mid-cap, multi-cap, small-cap, ELSS and balanced fund 10-year lump sum and SIP returns from Value Research are plotted against each other.
Since there is no way to predict 10 years ago which fund would have given 'good returns'*, this spread has nothing to do with fund selection.
This only tells us that one should not get married to our SIPs. If we wish to subscribe to the idea of periodic investing, monitoring the investment and switching funds ruthlessly, but objectively** is essential. Fund switching is a personal exercise and star ratings will not help (here I go again!).
* There are very few duds and very few exceptional performers. More on this later.
** Objectively excludes asking 'what to do?' at FB group, Asan Ideas For Wealth.
It is unfortunate that many treat mutual fund investing like paying LIC premiums and ask/state, "suggest funds I can invest in for the next 15 years" or "I plan to do an SIP in XYZ fund for next 10 years".
The ability to select funds with a specific process in mind is important. However, since we have no control over the future, more important is the ability to objectively review performance and take action. This again is not rocket science.Read more: How to review a mutual fund portfolio.
Periodic investing will work, but not always in the same fund! Of course, I could have take 15 or 20-year returns and showed that the handful of funds with such an age have all given double-digit returns. This means little as the next 15/20 years may not resemble this due to the number of funds that we have now.
Naturally, much of the mutual fund industry would like investors to start an SIP and not stop 'no matter what'. Which is why they make stopping SIPs tougher than starting one. I am willing to wager that many SIPS run because of inertia - due to the difficulty involved in stopping one. This is often incorrectly interpreted as 'increase in financial literacy'!!
Sorry about rambling on. Had to get that off my chest. Now back to the graph.
1) Notice the upward slope. A 'good' lump sum return (CAGR) typically implies a 'good' SIP return (XIRR). Read more: Understanding Annualized Return: CAGR and XIRR.
2) A high lump sum return implies the final NAV is much higher than the initial NAV. SIPs will work only when the fund or the index moves north. Read more: Rupee Cost Averaging in a Sideways Market.
- SIPs will work only if the markets (specific funds in this case) head north.
- Fund review is essential.
- Do not get emotionally attached to your SIP.
- If you are too lazy to stop a SIP be aware that there is
- a small chance of getting a below 'average' return (more later).
- only a small chance of getting an above 'average' return.
To be continued ...