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.
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Pattu Sir, Agree with you, However to Small investors currently it is only one option which may give inflation beating returns. Agree to your point that investors should actively manage and do the asset allocation.
I am not against SIP. Small investors must learn portfolio management if they are going to DIY. Is that not possible?
and to quote in Hindi ” Umeed pe Duniya Kayam Hai”
Where is the Ummeed directed at matters. Is it just on the asset class or our preparation to manage risk in the folio.
and so, i think, you say, debt has always a place in every portfolio!
Debt always has a place. This post has little to do with asset allocation.
After reading this, I have almost lost confidence on MF and started thinking for RD, FD, etc
Why? Have I said stop investing in SIPs?
So, you have now confused us even more. Please answer the foloowing questions:
1. Should one go in for SIP’s
2. If I have a lump sum (say Rs 5 lacs) to invest, should I invest the whole amount in one go or should I put it in a liquid fund and do a STP into an equity fund.
best regards
Shri
1. Should one go in for SIP’s
“No, I am not asking you to stop your SIPs or that equity will not work. I am saying it may not work!”
2. If I have a lump sum (say Rs 5 lacs) to invest, should I invest the whole amount in one go or should I put it in a liquid fund and do a STP into an equity fund.
How to invest a lump sum in an equity mutual fund?
To assume that a SIP will do well in the end (or it is not the end! – Guess the movie)
shawshank redemption?
No it is modified from “Everything will be all right in the end. If it’s not all right, it is not yet the end" from The Best Exotic Marigold Hotel
LOoks like is was forewarning. Please advice is investing in Real estate /plot /land a better option than SIP.
This is a forewarning to manage risk while doing a SIP. Not stop SIPs.
Fixed SIP doesn’t make sense….it should “flexible” SIP …Increase the SIP amount when market is down and vice versa..
Ok..SIPs may not work…or may actually need monitoring at regular intervals ( surely not like a day trader)….so…what should one do? Property, gold, shares….?
I must appreciate the author for writing such blog when the majority of MFs industry including IFAs, Financial Planner and portfolio managers are suggesting to start SIP in long term equity MF to build the wealth. Investors mind sets have started believing this as a strategy.
The author is right by saying if you invest in equity through SIPs or Lump sum the risk is not eliminated. There is no guarantee that the investment in equity MF will fetch you desired profits in 3y, 5y, 10y, 15y or more.
Whether you are investing through advisors or directly, it is very much necessary to monitor the fund performance.
One can build a strategy to monitor the fund performance every six months or yearly and take informed and realistic decision whether to continue with the fund, redeem or switch.
After all it is your own hard earned money and you would never wish to lose it.
Regards,
Thank you.
Excellent article/ blog post. The author is using facts (to create enough fear) to dispel myth about SIPs that they will somehow de-risk everything that is associated with equity investing. Actively managing risk is paramount even in SIP is an eye opener.
Dear Sir,
Would wait for few examples. that can be more eye opener.
thanks
Karthik
examples for what?
Kindly refer your last line of below paragraph.
Quote
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.
Unquote
ah! Yes. That was done in the very next post.
More of negative Article..! Disappointed..! ..It could have been more balance..! I have been investing vis MF SIP, since 10 years and Portfolio is grown 14% compounded..!
Which is one data point. Not everyone shared that experience: Dollar Cost Averaging aka SIP analysis of S&P 500 and BSE Sensex
I understand that this post has less to do in improvement in investment skills BUT its about preparation of mindset of “when it is equity, be prepared for whatever the outcome is though you have done your best”.
yup. Indeed. thank you.