Last Updated on December 29, 2021 at 5:40 pm
A “long-term” SIP can teach us many things about risk and reward. These are the lessons learned from an Rs. 500 a month SIP running since Aug 2009 in Sundaram Midcap Fund for a relative. Some tend to dismiss our earlier analysis on “SIP risk” as “theoretical”. So here are inferences with “real money”!
When the was SIP was started, it was an all-or-nothing high-risk, possible-high reward idea to pay for a child’s college education in a quiet, reasonably consistent fund. I figured if I fail, I can make up for it from elsewhere. This was not part of my regular goal-planning.
I have since then increased the SIP amount, but the analysis below is for Rs. 500 a month. The amount invested does not change the risk or return associated with the fund. After 11 years, the SIP is continued in the same fund only as an experiment.
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It is important for the reader to recognise the context here. For a regular goal, asset allocation and regular risk management are important. So the first lesson is NOT to put all or most of your money in mid cap funds! I would like to reiterate that this is now only an experiment from which I could afford to lose all. Kindly do not try this with your portfolios
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, I was under the incorrect assumption that “over the long term: midcap funds would beat large cap funds. 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.
Yes, I was a “direct-to-AMC” investor in regular plans. The AMC was pocking commissions from this fund until Jan 1st 2013. On 28th Jan 2013 I switched from regular to direct plan. You can see this a tiny downward blip below.
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% (after 9 years). Things change pretty fast in this space! In Aug 2019 it dropped to about 13% (after 10 years) and a year later it is 10% (after 11 years).
The most important lesson is, no matter how old your SIP, it will always react to market ups and downs. Risk does not get averaged and returns in an unmanaged SIP is down to luck or what time you decide to check it!
The 11-year SIP in Sundaram Midcap Fund
This is the evolution of the total investment and value.
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. The abolute gain or loss and the percentage (2nd graph below) illustrate how much SIP gains can swing.
From 0% gain to 120% in about two years from Sep 2013 and 130% drop in gains from Feb 2018 to March 2020. If I did not mention it before, this is from the 8th year to 10th year of the SIP.
This is the percentage gain or loss for a theoretical SIP started in April 2006. When the market started to correct in Feb 2018, the SIP was two months short of completing 12 years. About 175% of the accumulated gains were lost between Feb 2018 and March 2020.
Where is the so-called risk averaging benefit of SIP? Well, it does not exist. You can run a SIP for 100 years and the risk will never decrease.
Read more: Mutual Fund SIPs Do Not Reduce Risk! Beware of Misinformation
One can see this in a better way. The NAV of the fund and the SIP value are plotted together below. To highlight how the value of the SIP depends largely on the final value of the SIP (and not the “average” buying price), the two plots are normalised with respect to their values on 7th Aug 2020.
Initially, the number of units accumulated via SIP is small and the movement is largely determined by the investment month after month.m Once the value of the units accumulated is significant, the returns from a SIP simply depends on NAV movement.
This is the reason I keep talking about the SIP as filling water into a 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. Sales guys do not care about the shake in the bucket. They only want you to keep filing water no matter what.
Using the SIP XIRR Tracker tool, we can plot the annualized return month after month.
Notice that the XIRR has been falling since end-2014!! If a 20% return after 8-9 years of investing can become 10% today after 11 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 chance of that happening because of the lockdown is significant. The risk never decreases in the long term and SIP will not help in any way!
Summary
Please do not assume returns are low only because markets are down. The inferences made above can be and has been done in Aug 2019 and March 2018 (see links above) – bull market or bear market lessons on risk do not change.
In case you are confused, let us clarify: systematic, disciplined investing in equity is key to building wealth. SIP is just buying mutual fund units on the same date each month. SIP is not systematic investing. SIP is automated investing.
There is nothing wrong with automated investing as long as there is a system in place: A clear goal, a clear asset allocation a clear risk management strategy. If you leave a SIP running in the hope that it will work in future then you are leaving the fate of your investments to luck. Surely your money deserves better!
One can systematically invest each month AND systematically reduced risk in the portfolio. They are not mutually exclusive. See How to systematically reduce the risk associated with a SIP
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