A Mutual Fund SIP is Hope, Not a Strategy!

Too many investors believe that keeping their SIP alive and running over the ‘long-term’ is all that is needed to get ‘good returns’ from equity and achieve all their financial goals. Now that might happen in a fairy tale, but not in real life.

In real life, the SIP is a  method of buying mutual fund units periodically and not a strategy. In real life the SIP over the ‘long-term’  – which varies from 3Y to 5Y to 10Y to more, fails much too often.

Want proof?  Here is exhibit 1A.

Dollar Cost Averaging aka SIP analysis of S&P 500 and BSE Sensex

Whether you compare SIP returns with recurring deposit returns over 2Y, 5Y or 10Y, there will always be some funds which have beat an RD and some which have not.

Exhibit 1B: Value Research SIP Returns page

• Out of the 594 equity funds which are at least 3Y old, 143 have returns that are less than 10%. Difference bet max and min  return = 39.5%

• Out of the 288 equity funds which are at least 5Y old, 46 have returns that are less than 10%. Difference bet max and min  return = 32.4%

• Out of the 166 equity funds which are at least 10Y old, 41 have returns that are less than 10%. Difference bet max and min  return = 21.3%

• Out of the 64 equity funds which are at least 15Y old, no funds have returns that are less than 10%. Difference bet max and min  return = 13.2%

• Out of the 10 equity funds which are at least 20Y old, no have returns that are less than 10%.Difference bet max and min  return = 13.8%

No, the moral of the story is not long-term = 15Y and above!!

The moral of the story is that there are only 10 funds which are 20Y old and the last 20Y was fantastic for equity.

The moral of the story is that the next 20Y may not be like the last 20. After 20 years, we will have 500+ funds which will be 20Y old! Do you expect all of them to have beat a recurring deposit or get a double digit return?!

The amusing part is that many interpret these facts (esp. the difference bet max and min return) as ‘fund selection is important, therefore you need an advisor blah blah‘.

To say the very least, this is immature. Mutual fund selection is NOT important. In fact, it is the least important part of the portfolio management process.

Why? Because the right mutual fund cannot be selected!!

A portfolio with volatile assets should be monitored with the right personal benchmarks. To assume that a SIP will do well in the end (or it is not the end! – Guess the movie) is mere hope. And hope is not a strategy.

The best performer today could become a dud in a few years. So even if you choose the best funds today, it is imperative that the portfolio be reviewed and necessary course corrections taken. Knowing how to review is more important than knowing how to choose!

Yes, there is a lot of room left for a country like India to grow, and one must do all we can to benefit from this opportunity. When the GDP grows, our equity portfolios should at least grow at the same rate. This rate has to be above inflation since it is the rate at which businesses borrow.

BUT, that is the story of the asset class. Asset class returns NEED NOT match investor returns even if there are no behavioural flaws (gap) like selling low, staying away, doing nothing etc.

In fact, investor returns SHOULD NOT match asset class returns! (think 2008) Investor returns should match investor requirements – nothing less, nothing more (imo of course).

Not investor dreams or expectations (for they may not be logical), but investor requirements. Requirements that are derived from of a goal-planing exercise like this one: A Step-By-Step Guide to Long Term Goal-Based Investing.

If you started an SIP with hope, you’ve been had. Would the guys who go, “in the long run equity will outperform all asset classes”, fund your goals if they turn out wrong?!

No, I am not asking you to stop your SIPs or that equity will not work. I am saying it may not work!

R. Balakrishnan put it beautifully: “Equity will give returns but not when you want it to!” That just about sums it up.

Ignore the enthusiastic SIP selling (esp the memes) and the over-confidence. Understand your requirements better and do not hesitate to make changes to your portfolio accordingly. The way I see it, this is a personal process. I will try and provide some examples.

Whether you automate systematic investing or not, active portfolio management is essential in equity.

Active management does not mean timing the market!  I had covered this in Simple Steps to De-risk Your Investment Portfolio. There are so many ways to do this. We will have to develop our own system.

Moral of the story: Irrespective of whether a portfolio is actively managed or not, equity investing comes with no guarantees. Better to realise it now before it becomes too late for our financial goals.