A ten-year SIP can teach us many things about risk and reward. I have one running in Sundaram Midcap Fund for a relative. This was just an Rs. 500 SIP in a quiet, reasonably consistent fund. I tried this all-or-nothing idea by putting everything for that goal in a mid cap fund because I figured if I fail, I can make up for it from elsewhere.
Among other things, the first lesson is NOT to put all or most of your money in mid cap funds. I have earlier reviewed the fund: Sundaram Mid Cap Fund Review: A consistent performer. Today I would say it is a quiet fund that does not draw much attention. Ten years ago, as a rank newbie, I do not quite recall how and why I chose this! Perhaps, since my first investment was in Sundaram Tax Saver and I knew where the AMC office is, I picked this one! Read more: Ten Years of Mutual Fund Investing: My Journey and lessons learned
I had earlier written about the journey of this SIP in Mar 2018. At that time, the XIRR (annualized return) was a nice fat 20%. Things change pretty fast in this space (lesson # 2). Since things have changed quite a bit since then, a revisit will not hurt. I would like to reiterate that this was only an experiment from which I could afford to lose all. Kindly do not try this with your portfolios
The ten-year SIP in Sundaram Midcap Fund
This is the evolution of the total investment and value. Can you guess what that sharp dip is?
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Looking at this, it is quite easy and convenient to make some lazy conclusions such as SIPs make one disciplined (no they do not) and how SIPs always work in the long term (no they do not). If you wish to see what you wish to see then the rest of the article may not help. If you wish to dip deeper and understand risks, then let us begin.
First, look closely. For the first four years, the return is zero. In fact, if you consider a SIP from April 2006, the return would be zero for the first seven years! (Lesson # 3), I had then pointed out that the value can if the market corrects (hexagon) and is exactly what you see above.
The SIP value hit a peak on 1st Jan 2018 (8.5 years after inception) and for the last 1.5 years, the value has been lower than the peak. Where is the so-called risk averaging benefit of SIP? Well, it does not exist (lesson # 4). One can see this in a better way. Read more: Mutual Fund SIPs Do Not Reduce Risk! Beware of Misinformation
When the market does not move up much, there is not much correlation between the market and the SIP investment value. Once the market moves up, then the SIP value and returns depend on the market. This is the reason I talk about the SIP as a water bucket on shaky ground.
Imagine filling a bucket with small mugs of water. These mugs are the monthly instalments. Most people worry about filling the bucket when the market is shaky (when is it not?!) or worry about when to add the next instalment. They fail to realise that the bucket is on shaky ground. If the bucket falls then the SIP, no matter how old, will always result in a loss. That is the reason I keep saying SIPs do not reduce risk.
Notice that the XIRR has been falling since end-2014!! If a 20% return after 8-9 years of investing can become 13% today after ten years, there is more than a reasonable chance of it becoming single digit and FD-like if the midcap segment fails to shine for the next few years. The risk never decreases in the long term (lesson # 5), running a SIP will not help manage this risk!
I can hear you say, “Pattu, why do you keep saying the same thing again and again?” Answer: Because, each time I say it, it reaches new audiences. How do I know you ask, well that is my secret.
Summary
While I shall continue investing in this fund, I have also prepared a backup source for the intended purpose. Kindly do not assume I am against SIPs. I am only against assuming starting a SIP and running it is all that is necessary to “build wealth”. As the lessons from this ten-year SIP has shown, a lot more is necessary to reduce risk and sleep peacefully. The amount involved is so low that I never bothered. If this my net worth at stake, I would have done it differently and indeed do it differently. See: My personal financial audit 2018
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