SIP Rolling Returns Analysis with Sensex Data

No matter how often we mention/promote/advertise that equity investments if continued over a long enough period would generate handsome returns, many investors seem to require constant reassurance and encouragement to continue their equity investments.

A person who wishes to remain anonymous made the following SIP rolling returns analysis with Sensex data to provide his friends this reassurance and encouragement.  He readily and most generously agreed to share his analysis but chose to remain anonymous 🙁

The analysis

Assuming a SIP investment in an index mutual fund that tracks the Sensex, rolling return averages have been approximately calculated for 1, 2, 3, 5, 10, 15, 20, 25 and 30 year periods.

For data ranging from April 1979 to Aug. 2013 there would be as many as 53 periods of 30 year duration separated by a month!  For example, April 1979 to 2009 is the 1st period, May 1979 to May 2009 the 2nd period and so on.

Part of the results are tabulated below

Sensex-sip-rolling-returns-analysis
Results of SIP Rolling returns analysis with Sensex data

Notice how the average* SIP return varies only by about 2%.  This however, has no meaning unless we look at the standard deviation.  (* average here is the arithmetic average of all rolling return data)

Standard deviation, as mentioned before is a measure of how much the actual results can vary from the average, assuming that the data points follows a normal distribution (a very good introduction to normal distributions may be found here).

A more endearing definition:

The average 1 year rolling return is 16%. The standard deviation is 34%. This means 68 times out of 100, the return you get will be anywhere between 16% -34% to 16%+34%.

This just means over a one-year period, the return could just about be anything!

Contrast this with the data for a 20-year rolling return.  Over this duration, 68 times out of 100 the return you get will be anywhere between 13.6%-2.3% to 13.6%+2.3%

That is the range of fluctuations in the returns has come down significantly when the investment tenure is longer. In the table, you can see that the standard deviation drops to 1-2% for a tenure of 20 years or more.

The increase in probability of getting more than 10% return with increase in investment tenure is a consequence of the decrease in standard deviation.

Bottomline: If we start a SIP in a diversified equity mutual fund for a long-term goal a good 15-20 years away and never stop it, the chances of us getting a double-digit return is reasonably high.  The simplest example of such a fund is an index fund as assumed in this analysis.

Take-home message:

Equity investments are capable of producing high returns only because they are volatile.  The only way to take advantage of fluctuating returns is to stay invested.

That way the fluctuations become much smaller than the average return (more on this later).

That is the geometric average of fluctuating returns when considered for a long enough period is high with a small standard deviation.  To put it plainly the net return is high!

Download the SIP Rolling Returns analysis with Sensex data

(It also includes a lump sum analysis)

If you wish to learn more about volatility you could try out these calculators:

Portfolio Rebalancing –Volatility Simulator

Debt Fund vs. FD –Volatility Simulator

Credits:

As mentioned before, this analysis was made by a person who wishes to remain anonymous.  Please join me in thanking him for his generosity.

Do share your thoughts on this analysis.

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42 thoughts on “SIP Rolling Returns Analysis with Sensex Data

  1. bharat shah

    thank you and anonymous for this and other calculators prepared with great efforts . though i can not grasp all due to my limitations. however i don't understand how did you state in your both examples , i.e. for 1 yr. and 20 yrs. 68 times out of 100 times ?

    Reply
    1. pattu

      The 68 represents the number of trial out of 100.
      That is 68 people do 1 year investments ... and
      68 people do 20 year investments ....

      Thank you.

      Reply
  2. bharat shah

    thank you and anonymous for this and other calculators prepared with great efforts . though i can not grasp all due to my limitations. however i don't understand how did you state in your both examples , i.e. for 1 yr. and 20 yrs. 68 times out of 100 times ?

    Reply
    1. pattu

      The 68 represents the number of trial out of 100.
      That is 68 people do 1 year investments ... and
      68 people do 20 year investments ....

      Thank you.

      Reply
  3. Mohana Ganesh

    Dear Sir :

    You have mentioned in Bottomline - If we start a SIP in a diversified equity mutual fund for a long-term goal a good 15-20 years away and never stop it, the chances of us getting a double-digit return is reasonably high.
    By this do you mean one should continue investing for 15-20 years. Can one stop investing after say 2 years (if we find the Mutual Fund not giving good returns) but remain invested for 15-20 years? If so how should I collect the returns.
    Can one invest in different funds vide SIP for 2-3 years and remain invested for 15-20 years.

    Thank you,

    Reply
    1. pattu

      Yes all those possibilities are not just possible but also quite practical.

      An XIRR calculator is enough to calculate net returns when breaks are involved. By net return, I mean from when first investment started to the current date.

      The same is also true when multiple mutual funds are involved.

      Reply
  4. Mohana Ganesh

    Dear Sir :

    You have mentioned in Bottomline - If we start a SIP in a diversified equity mutual fund for a long-term goal a good 15-20 years away and never stop it, the chances of us getting a double-digit return is reasonably high.
    By this do you mean one should continue investing for 15-20 years. Can one stop investing after say 2 years (if we find the Mutual Fund not giving good returns) but remain invested for 15-20 years? If so how should I collect the returns.
    Can one invest in different funds vide SIP for 2-3 years and remain invested for 15-20 years.

    Thank you,

    Reply
    1. pattu

      Yes all those possibilities are not just possible but also quite practical.

      An XIRR calculator is enough to calculate net returns when breaks are involved. By net return, I mean from when first investment started to the current date.

      The same is also true when multiple mutual funds are involved.

      Reply
  5. Md. Shahin Kashfi

    Dear Pattu,
    Equity in the long term always gives handsome return but it requires deep understanding and disciplined investment. Mutual fund is the hassle free investment and Investing SIP (Equity) is the disciplined way of investment which in the long term gives handsome return. If any body going for around 20 years horizon midcap fund is good choice. MF investments are subject to market risk, before investing read scheme related document carefully.

    Reply
    1. pattu

      Thanks for your views. The point of the post to encourage people to invest in equity MFs in the first place. A equity portfolio should be well diversified in terms of market cap and geography to lower portfolio volatility.

      Reply
  6. Md. Shahin Kashfi

    Dear Pattu,
    Equity in the long term always gives handsome return but it requires deep understanding and disciplined investment. Mutual fund is the hassle free investment and Investing SIP (Equity) is the disciplined way of investment which in the long term gives handsome return. If any body going for around 20 years horizon midcap fund is good choice. MF investments are subject to market risk, before investing read scheme related document carefully.

    Reply
    1. pattu

      Thanks for your views. The point of the post to encourage people to invest in equity MFs in the first place. A equity portfolio should be well diversified in terms of market cap and geography to lower portfolio volatility.

      Reply
  7. anonymous

    There are two types of mutual funds. Actively Managed and Passive Funds. The basic difference between two is in actively managed funds, fund managers takes the call in which stock to invest,  when to buy, when to sell. This basically calls for prediction risk & subjectivity risk.

    Predicting the future on consistent basis over long period (15-20 years) is practically not possible for any human being, as stock market is part of behavioral and social science. In physical science one may exactly predict the future outcome. E.g. civil engineers can exactly estimate strength of a pillar by applying formula. Because characteristics of steel,  bricks, cement etc does not change overnight. However price of a stock depends on behavior of a human being and how one interprets the news affecting stock prices.

    Again value of a stock is always subjective. One fund manager may say xyz stock is good at same time another fund manager may say same xyz stock is not good. Only time will say who was right and who was wrong.

    So, it is better for an investor to eliminate this risk. And prudent way to do is to invest in collective wisdoms of the market via Index Funds I.e. passive funds.

    In long time frame I.e. 15-20 years many funds will come and go, many fund managers will come and go,  many stocks may come and go but what will remain consistently is an INDEX. So one may need not to worry about performance tracking frequently. One may get fair share of market return via index

    Reply
  8. anonymous

    There are two types of mutual funds. Actively Managed and Passive Funds. The basic difference between two is in actively managed funds, fund managers takes the call in which stock to invest,  when to buy, when to sell. This basically calls for prediction risk & subjectivity risk.

    Predicting the future on consistent basis over long period (15-20 years) is practically not possible for any human being, as stock market is part of behavioral and social science. In physical science one may exactly predict the future outcome. E.g. civil engineers can exactly estimate strength of a pillar by applying formula. Because characteristics of steel,  bricks, cement etc does not change overnight. However price of a stock depends on behavior of a human being and how one interprets the news affecting stock prices.

    Again value of a stock is always subjective. One fund manager may say xyz stock is good at same time another fund manager may say same xyz stock is not good. Only time will say who was right and who was wrong.

    So, it is better for an investor to eliminate this risk. And prudent way to do is to invest in collective wisdoms of the market via Index Funds I.e. passive funds.

    In long time frame I.e. 15-20 years many funds will come and go, many fund managers will come and go,  many stocks may come and go but what will remain consistently is an INDEX. So one may need not to worry about performance tracking frequently. One may get fair share of market return via index

    Reply
  9. Mohana Ganesh

    Dear Pattu :

    Anonymous has said that "Prudent way to do is to invest in collective wisdoms of the market via Index Funds I.e. passive funds." Can you please give some examples of Index Fund.

    Thank you

    Reply
  10. Mohana Ganesh

    Dear Pattu :

    Anonymous has said that "Prudent way to do is to invest in collective wisdoms of the market via Index Funds I.e. passive funds." Can you please give some examples of Index Fund.

    Thank you

    Reply
  11. bharat shah

    though i am not against investing in index funds and find substance in arguments of its favour , i feel , in today's environment , when lot of information available on net , one can better be in active mutual funds for long term (say by selecting ones through the way as suggested by shri pattu) . it could turn 15-25% better (from past performance) than index fund on long term. one can use filtering them by selecting AMC following process based rather than individual. of course monitoring the performance is required to be followed

    Reply
    1. pattu

      Dear Mr. Shah,

      Thank you for sharing your thoughts. Over a long period of time, I think the index returns will not be 15-25% different. Perhaps about 5% which is a big difference. However,monitoring and cost of fund switches will eat away a bit. For people who don't have time and who don't want to go to a planner a index fund is the best option.

      Reply
  12. bharat shah

    though i am not against investing in index funds and find substance in arguments of its favour , i feel , in today's environment , when lot of information available on net , one can better be in active mutual funds for long term (say by selecting ones through the way as suggested by shri pattu) . it could turn 15-25% better (from past performance) than index fund on long term. one can use filtering them by selecting AMC following process based rather than individual. of course monitoring the performance is required to be followed

    Reply
    1. pattu

      Dear Mr. Shah,

      Thank you for sharing your thoughts. Over a long period of time, I think the index returns will not be 15-25% different. Perhaps about 5% which is a big difference. However,monitoring and cost of fund switches will eat away a bit. For people who don't have time and who don't want to go to a planner a index fund is the best option.

      Reply
  13. bharat shah

    i agree with you. however i like to clarify that when i said 15-20% , i did not mean % point cagr over that of index fund , but i mean the % point cagr would be better by 15-20% over cagr for index fund , i.e. if long term cagr for index fund is 20%, that of active fund could be 23%-24%. this happens in past at least for HDFC TOP200, HDFC EQUITY , F.I. BLUECHIP and icicipru dynamic. this is just for information for new aspirants .

    Reply
  14. bharat shah

    i agree with you. however i like to clarify that when i said 15-20% , i did not mean % point cagr over that of index fund , but i mean the % point cagr would be better by 15-20% over cagr for index fund , i.e. if long term cagr for index fund is 20%, that of active fund could be 23%-24%. this happens in past at least for HDFC TOP200, HDFC EQUITY , F.I. BLUECHIP and icicipru dynamic. this is just for information for new aspirants .

    Reply
  15. dilip

    very nice and informative.gave confidence to continue my sip.
    please write article in RE sector in India.Eagerly waiting....Thank you both

    Reply
    1. pattu

      Hi Dilip, All credit to our anonymous contributor. Reg. RE, I know very little. Let me see if I can get someone knowledgable to write a guest post.

      Reply
  16. dilip

    very nice and informative.gave confidence to continue my sip.
    please write article in RE sector in India.Eagerly waiting....Thank you both

    Reply
    1. pattu

      Hi Dilip, All credit to our anonymous contributor. Reg. RE, I know very little. Let me see if I can get someone knowledgable to write a guest post.

      Reply
  17. Vince

    Good post by Anon.

    The returns shown are valid. But the problem I see is that they are all based on PAST occurrences, and extrapolate from the present, which is Equity. And what an investor needs to do is look at the future..

    80s - Equity wasn't the in-thing to invest in. My dad invested in a few stocks back then, and after he passed away, I discovered that many companies had wound up, and the remaining were duds. Financial analysis wasn't easy back then (people becoming middle class, and manipulations in the markets) and the common man depended on his broker (who had his own agenda).

    90s - Equity markets picked up, but my dad was already bitten by his lack of returns, and didn't look at the markets. Thankfully looked into Gold and Real Estate a little bit.

    2000s - Dad finally restarted in the 2000s, and that too only intermittently in MFs.

    2010s- I started earning in the late 00s, made a few mistakes in the equity stock markets, after which i've kept strict limitations in what I invest.
    I see that the growth story was only in the real estate bought in 80s, 90s, and the equity markets in 00s. Only Gold showed a consistent rise ALL the way.

    Can we have a post on analysis of what could be growth in FUTURE, based on past occurrences?

    Gold? Real Estate? Debt? Equity- if so, sectors & regions?

    Thanks!
    Regards
    Vince

    Reply
    1. pattu

      Hi Vince,

      The key point is that one has to stay invested no matter what happens for at least a decade to see returns from equity. Yes it is based on the past. That is all that one can do. Yes the future may be not be anything like the past. Based on 100+ years of global market history, I am of the firm opinion that the future will eventually resemble the past, provided we stick around. That is the key point of the post.

      The beauty of equity investment is its volatile nature allows several entry opportunities unlike Gold which as you said just keep going up with the occasional crash like early this year.

      How could any one analyse the future? Anlysis by its very nature needs inputs which can only be got from the past. Any talk about the furture of an asset class is not analysis but speculation.

      If you are unsure of where to invest, here is a simple fool proof way that has worked impressively, irrespective of market conditions:

      http://freefincal.com/the-permanent-portfolio-a-fascinating-low-volatility-option-for-the-long-term-indian-investor/

      Thanks. Keep visiting.

      Reply
  18. Vince

    Good post by Anon.

    The returns shown are valid. But the problem I see is that they are all based on PAST occurrences, and extrapolate from the present, which is Equity. And what an investor needs to do is look at the future..

    80s - Equity wasn't the in-thing to invest in. My dad invested in a few stocks back then, and after he passed away, I discovered that many companies had wound up, and the remaining were duds. Financial analysis wasn't easy back then (people becoming middle class, and manipulations in the markets) and the common man depended on his broker (who had his own agenda).

    90s - Equity markets picked up, but my dad was already bitten by his lack of returns, and didn't look at the markets. Thankfully looked into Gold and Real Estate a little bit.

    2000s - Dad finally restarted in the 2000s, and that too only intermittently in MFs.

    2010s- I started earning in the late 00s, made a few mistakes in the equity stock markets, after which i've kept strict limitations in what I invest.
    I see that the growth story was only in the real estate bought in 80s, 90s, and the equity markets in 00s. Only Gold showed a consistent rise ALL the way.

    Can we have a post on analysis of what could be growth in FUTURE, based on past occurrences?

    Gold? Real Estate? Debt? Equity- if so, sectors & regions?

    Thanks!
    Regards
    Vince

    Reply
    1. pattu

      Hi Vince,

      The key point is that one has to stay invested no matter what happens for at least a decade to see returns from equity. Yes it is based on the past. That is all that one can do. Yes the future may be not be anything like the past. Based on 100+ years of global market history, I am of the firm opinion that the future will eventually resemble the past, provided we stick around. That is the key point of the post.

      The beauty of equity investment is its volatile nature allows several entry opportunities unlike Gold which as you said just keep going up with the occasional crash like early this year.

      How could any one analyse the future? Anlysis by its very nature needs inputs which can only be got from the past. Any talk about the furture of an asset class is not analysis but speculation.

      If you are unsure of where to invest, here is a simple fool proof way that has worked impressively, irrespective of market conditions:

      http://freefincal.com/the-permanent-portfolio-a-fascinating-low-volatility-option-for-the-long-term-indian-investor/

      Thanks. Keep visiting.

      Reply
  19. Vince

    Thanks a lot for your reply sir!
    That link was what I was looking for. (i'm only now slowly going through the backlog of posts from your site)

    Reply
  20. Vince

    Thanks a lot for your reply sir!
    That link was what I was looking for. (i'm only now slowly going through the backlog of posts from your site)

    Reply

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