Do not expect returns from mutual fund SIPs! Do this instead!

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Here us why it makes little sense to expect any return from a mutual fund SIP. Instead of focussing on a target return, investors should focus on a target corpus with a clear goal in mind because this is simpler and easier to achieve. In what follows my goal is to discuss the risk associated with equity or any mutual fund investment and not to discourage people from investing in equity.

This is a follow up to yesterday article on huge difference in SIP returns from the same fund: how is it possible. When we looked at the five year rolling SIP returns of DSP Small Cap Fund, investors immediately assumed when the duration is increased, the spread in returns will come down and “all will be well”. Sadly, this is not the case.

Do not expect returns from mutual fund SIPs! Do this instead!

While we have a reasonable number of ten years return periods (in which the spread is significant), any longer then the history is too short to infer anything. So as done previously Dollar Cost Averaging aka SIP analysis of S&P 500 and BSE Sensex, we will have to look at S& P 500 returns data.

Five Year Rolling Returns of Franklin India Blue Chip Fund

To understand why one should not expect any returns from a mutual fund SIP, let us look at rolling SIP returns of one of India’s oldest mutual fund: Franklin India Blue Chip. In a rolling SIP returns graph, each data point is a SIP return for a specified duration and the SIPs are started one month apart.

5 year SIP rolling returns of Franklin India Blue Chip Fund

The number of 5-year data points is 242 (not too much, but reasonable). Now there are two things one can infer from such a rolling returns graph. The spread in returns in the vertical axis. All the way from negative to 50%+. If someone were to start a SIP in this fund or any fund and ask, “what return can I expect in five years?”. Anyone with a pinch of brain and an ounce of conscience would either say: “cannot say” or at least point out that the focus of investing should be elsewhere.

The second aspect is the duration in the horizontal axis. It represents the period in which investments of all 242 SIPs were started: Dec 199×3 to ~ 2014.

Ten Year Rolling Returns of Franklin India Blue Chip Fund

Does the spread get smaller over ten years? Yes, but hardly small enough to expect anything. The number of data points also get smaller (182). Also notice the duration has considerably decreased.

10 year SIP rolling returns of Franklin India Blue Chip Fund

The other worrying aspect is the general southbound movement of the full envelope. One cannot even expect 10% return from a 10Y SIP in future and this is before tax! Someone on YouTube (see video below) commented that this is due to a fall in inflation so real returns are intact. Fact is that actual inflation in India has nothing to with the inflation government reports.

Those government numbers do not account for the price of services like education, medicine, hospitality etc and therefore real inflation is well above reported inflation. So real returns for at least Franklin Blue Chip investors have decreased over the years.

Fifteen Year Rolling Returns of Franklin India Blue Chip Fund

15 year SIP rolling returns of Franklin India Blue Chip Fund

The number of data points further reduce to 11 and the period of investment reduces to about a decade between 1993 and 2003. Since this was a turbulent period with an almost flat Sensex, it make little sense to infer future returns from this investment window. Even then there is a gradual dip in returns here too.

Twenty Year Rolling Returns of Franklin India Blue Chip Fund

20 year SIP rolling returns of Franklin India Blue Chip Fund

There are only 62 20-year data points of investments made between Dec 1993 and early 1999. That is a five-year window. It is silly to judge future returns or expect anything from this graph. Investors when they look at such graphs say they are “de-motivated”.  Sadly, they are missing the point: The message is not to avoid equity. The message is to avoid expectation.

The problem is that many investor have no system of investment in place. They treat mutual funds like insurance policies where all they have to do is to pay the premiums and incorrectly assume despite daily ups and downs, everything will turn out all right. Before we consider the solution to investing without return expectations, let us consider S& P 500 data.

Fifteen Year Rolling Returns of S& P 500 (price index)

The advantage with S&P 500 is the history. We have 1025 15-year SIP return data points. The US was not exactly a developed country in the early 20th century. They went though economic depression and war. It should clear that the spread in a buy and hold 15Y SIP in S&P 500 is simply way too much to assume it would always beat US inflation.

15 year SIP rolling returns of S&P 500 price index

Twenty Year Rolling Returns of S& P 500 (Price Index)

20 year SIP rolling returns of S&P 500 price index

The situation over 20-years (1145 data points) is hardly any different. This is the reason why US finance gurus emphasize on international diversification (which will reduce risk and not enhance always returns).

What is the solution?

So one cannot expect any return, so what is the solution. First let us clarify that a bit. One should not expect any return is the idea is to simply buy units and live in hope. As shown before – How to reduce risk in an investment portfolio, no matter what the sequence of returns is (which is the reason for the return variations), one can with a clear asset allocation plan and step wise reduction in equity can help us reach a target corpus.

So the solution is to replace target return (= expectation) with a target corpus. This is possible only when we are clear about the purpose of the investment. You can download the Freefincal Robo Advisory Software Template and create a concise  plan for each goal. This does assume a 10% return from equity for 10+ year goals, but that becomes irrelevant as the equity allocation is reduced well before the goal dead line.

An alternative to this is to play it by the ear and gradually increase the fixed income corpus and ensure there is enough money to meet the goal, so returns do not matter. See: My personal financial audit 2018

Another alternative is to employ one of the market timing methods discussed and reduce risk. This works only if the investor is unafraid of taxes and exit loads.

Whatever method you choose, there is no need to act as if there is no point in equity investing. It is only a matter of having a goal and a system (only then it becomes a SIP) to reduce risk.

Video Version Part 2 (this post)

Do not expect returns from mutual fund SIPs! Do this instead!

Video version part 1

Huge difference in returns from SIP in the same mutual fund! How is it possible?!

Also check out

Why we need to invest time & money as much as possible when our parents are young and able!

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About the Author M Pattabiraman author of freefincal.comM. Pattabiraman is the co-author of two books: You can be rich too with goal based investing and Gamechanger. “Pattu” as he is popularly known, publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis, including a robo advisory template for use by beginners. Contact information: freefincal {at} Gmail {dot} com He conducts free money management sessions for corporates (see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints.

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12 Comments

  1. Returns from investment in equity either direct or thru MF essentially depends on timing. So let us not invest/redeem randomly. For this sensex movement doesn’t guide us rightly, as many a time sensex lowers/rises but Fund or a specific equity may rise/fall. Besides to get rid off taxes & exit load, one needs to remain invested for at least 365 days. So tracking equity/NAV price is important.

  2. Nice article indeed but it created a doubt. Isn’t our goal of investment is to beat Fixed Deposit intermediate by investing in mutual fund? So basically it my goal is to with draw money after 10 yr, I would be expecting growth of at least 10% over the 10 yr period compounded not cross return. Isn’t it fair?

  3. Gentleman in VIDEO either has lost money in mutual FUND OR doesn’t KNOW WHAT HE IS taking. Most OF THE SIP HAVE generated comparatively better returns than FD in longer periods.probably he should have consulted some qualified or with expertise and then invested.feel sorry for the guy. ADDITIONALLY instead of wasting time in making this video he should invest his time in educating himself before buying any fund.

  4. For person like me who started late investing in equity and has accumulated good chunk in fixed income and also regular mandatory investment like EPF, how to achieve 50% equity allocation as investment required will be quite high.

  5. The fund that you have taken for case study is the worst performing fund in 2 decades….take funds like Hdfc top 100 or Axis blue chip fund… they will show you the true power of sip… Don’t muslead investors…if someone had invested in 5k sip in any of these funds in 1995…,by now they would have gain 20 folds….

  6. Hi sir.
    I went through your blog.I think it’s an eye-opener and slight demoralising for me. Sir I am investing in ELSS,ULIP,LIFE INSURANCE, HEALTH INSURANCE.
    My only investment are in above only in accordance with sec80c n D.
    My assets allocation is 70:30 to equity and debt.My investment in ABSL TAX SAVINGS 96,ABSL PURE VALUE,FT DEBT MF,SBI MAG MULITICAP,TATA AIA.
    Now I am confused….Shall I invest PPF/NPS/FD …which has atleast stable n fixed returns.
    Please advise sir. THANKS IN ADVANCE SIR

  7. Note that subse bada fund is mutual funds of india. Selection is important, I am a dealer and start investment with me.

    U can savings like water monthly and u got tree in ten years returns

  8. It all depends on how we think

    1) A person earning 20000 and the person earning 100000 can’t be the same

    2) Nifty next 50 returns in 10 years is around 8% where as epf,vpf,ppf given around 9% with zero volatility.

    3) People lived without health insurance,life insurance as well(In old days without Toothpaste,Soap,Smartphone,Vehicle etc) but now it is mandatory

    4) Everyone can’t become Buffet,Graham.We can only count in numbers who are successfull

    etc..

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