Worried about turbulent markets? Thinking about stopping your stopping your SIP instruments? If you believe that our economy is bound to grow and that we should profit from it, I would strongly suggest that you do not stop your SIPs or equity investments now. Instead use the time to accumulate more units.
Let us track the XIRR of a SIP in Franklin India Blue Chip Fund from 3rd June. 1996 to 3rd Feb 2016. A total of 228 installments spread over nearly 20 years! This post was first published on May 2nd 2015 and has now been updated. I thank fee-only financial planner Melvin Joseph for suggesting I write about SIP volatility and why investors should not stop their SIPs now.
The XIRR of the investment is computed at each SIP date. That is, each month. XIRR as you may know, is representative of the average rate at which the instruments compounds each year.
New Graph
Old graph, same XIRR data, but NAV in log scale.
Notice how closely the XIRR mimics NAV movement. Notice the volatility in XIRR. You need nerves of steel to handle equity, and we are talking about a blue chip fund!! God bless those with ‘aggressive risk appetites’!
I think the sharp drop around 2000 is related to the dot com crash (correct me if I am wrong). That is a bigger crash for FIBCF than 2008.
The XIRR reacts sharply in both instances but is higher in 2000 – much higher. It is tempting to think that this is because the SIP is much older in 2008(see below), but I think the stocks that the fund held during both times is also important to consider.
In Oct 2001, after 6+ years and 74 SIP installments, FIBCF had an XIRR of ….. 0%
SIPS will not help you during a sideways market! All well to say, ‘if you have held on for so many years, you will be rewarded’. Can you really blame an investor if he/she runs away from equity after 6 years of patience!
It is only during the start of the last bull run that FIBCF started to deliver. Since Nov. 2003 to April 2014, the average XIRR was 22.27%. Not bad at all.
Even the fall during the 2008 crash, though significant, was not alarming.
Question is, if I continue my SIP though one market cycle (bull run followed by bear run or bear run followed by bull run ), will the volatility in XIRR reduce?
This data certainly suggest so. The monthly change in NAV is pretty much constant for the entire duration. The monthly change in XIRR is violent to start with drops to a low number after about 9 years.
Does this mean, older the SIP, less the volatility? The volatility around the 2008 crash is not visible! For an investor who had braved the sideways market after the Harshad Mehta scam and the dot-com crisis, the 2008 crash would like chicken feed.
Is because of fund management or because of the SIP? Hard to tell. Even if it has nothing to do with a SIP, it is still encouraging stuff.
I strongly believe that If I let my dull and boring SIPs continue, things should hopefully get better. Continue in the above example is about 10Y after which the next 9 years were pretty good.
So rain or shine, don’t worry about short-term market movements. keep Calm and MDBSC on!
Here is an illustration by Melvin. Consider two mutual funds. One whose NAV movement is linear and another which is volatile.
As long the volatile mutual funds, moves north, the investor will get a higher corpus because more units are purchased when the NAV dips. This is of course, a simplistic illustration. The point is that it pays to stay invested during turbulent times. If you think our economy will grow and our GDP will grow, that will sooner or later get reflected in the market movement.
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I haven’t looked closely at how the different funds performed in the dotcom bubble – I was more into real estate at that time. My vague recollection is that HDFC Equity fund did reasonably well – the decline from high to low was around 30%. The chart for it may look better than that of FIBCF.
I haven’t looked closely at how the different funds performed in the dotcom bubble – I was more into real estate at that time. My vague recollection is that HDFC Equity fund did reasonably well – the decline from high to low was around 30%. The chart for it may look better than that of FIBCF.
Thanks Pattu. Are you planning to share the calculator for this? And if yes, can we have an option to increase the SIP amount by a chosen percentage points every year (which would be closer to what a typical SIP investor would end up doing) and then see where this lands up? (intent being, come rain or shine where does this typical scenario lead to)..
Thanks Pattu. Are you planning to share the calculator for this? And if yes, can we have an option to increase the SIP amount by a chosen percentage points every year (which would be closer to what a typical SIP investor would end up doing) and then see where this lands up? (intent being, come rain or shine where does this typical scenario lead to)..
Excellent insights, this is a unique way to look at past data. My understanding of XIRR is that its a more effective measure over long durations, as during the short term it tends to give extreme values. For example, a SIP started early 2014 would be giving extremely good returns today (till Apr 2015) given the recent bull market (not sure if its still on though).
Excellent insights, this is a unique way to look at past data. My understanding of XIRR is that its a more effective measure over long durations, as during the short term it tends to give extreme values. For example, a SIP started early 2014 would be giving extremely good returns today (till Apr 2015) given the recent bull market (not sure if its still on though).
I think the sharp drop around 2000 is related to the dot com crash (correct me if I am wrong).
… I think the sharp drop in NAV was due to announcement of 1: 1 bonus in FIBCF and that caused it's NAV to drop by 50%.
I think the sharp drop around 2000 is related to the dot com crash (correct me if I am wrong).
… I think the sharp drop in NAV was due to announcement of 1: 1 bonus in FIBCF and that caused it's NAV to drop by 50%.
sir I have a stupid question
already my equity mutual funds are currently -20%. I don’t have risk tolerance more than that
I will continue my sips but I am 2 minds whether to withdraw current balance and keep it in debt fund ?