I started an Rs. 500 SIP in Sundaram Midcap Fund (then known as Sundaram Select Midcap) for an extended family member’s higher education in Aug 2009. Here are some lessons on investment risk and reward from the investment.
Kindly note that I do not count this investment as part of my net worth and have doubled the amount sometime back. It is an all-or-nothing high-risk, possible-high reward idea. I figured if it failed, I would pay for it from elsewhere. Kindly do not reproduce this idea for your own goals.
When discussing a child’s future goal, readers often ask, “What if the wishes of the child change mid-way? How do we adjust the goal plan?” Well, 13 years is a long time, and a rather dramatic change occurred in this case. I am continuing to invest as usual, but the expected educational expense is likely to be lower than originally envisaged at the time of writing. Life happens!
Important: We are not against the idea of investing in MFs or investing in MFs via SIPs. Systematic investing is an excellent way to build long-term wealth. Most of our net worth is invested in mutual funds, and we strongly believe in systematic investing. However, having false notions about the SIP and believing false propaganda by those with vested interests is ill-advised.
Blindly investing via SIP without a plan is like leaving the fate of our hard-earned money to luck. Yes, the MF units will accumulate, but their return is not determined by when you purchase them. The final market value only determines the return at the time of redemption or return calculation, as shown below.
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The only benefit of SIPs is they allow MF units to accumulate without worrying about “when” to invest. See: Rupee cost averaging via SIP has no benefit other than accumulating MF units.
From a behavioural point of view, systematic investing can easily trump market timing, provided it is accompanied by proper planning. We are not trying to dispute this here! We aim to point out that starting a SIP without an investment plan and continuing it in the hope everything will turn out ‘ok’ in the long-term is folly.
When we published, Myth Busted: SIPs do not reduce risk or enhance returns! Some claimed it was a “theoretical” study. Here are lessons with real money.
I had earlier reviewed the fund in Feb 2019. Twelve years ago, as a rank newbie, I did 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. Since my first investment was in Sundaram Tax Saver, and I knew the AMC office, I picked this one! Read more: Fourteen 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 the regular to the direct plan.
I had earlier written about the journey of this SIP first in Mar 2018. The XIRR (annualised return) was an excellent fat 20% (after nine years). Things change pretty fast in this space! In Aug 2019, it dropped to about 13% (after ten years). In Aug 2020, the XIRR was 10% (after 11 years), and in Aug 2021, it was close to 17% (12 years). Currently is about 15% (13 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 13-year SIP in Sundaram Midcap Fund
This is the evolution of total investment and value.
It is pretty 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, the rest of the article may not help. Let us begin if you wish to dip deeper and understand risks.
First, look closely. The return for the first four years is zero (-2%, to be exact). The abolute gain or loss percentage is shown below and illustrates 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 and then another 140% gain! Then a fall and then a gain .. ad infinitum.
The percentage gain or loss for a theoretical SIP started in April 2006 is shown below. 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, followed by a ~ 290% gain. Then a fall and then a gain .. ad infinitum.
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. If the market moves up, returns increase, if the market falls, returns fall.
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 SIP value depends largely on the final value of the SIP (and not the “average” buying price), the two plots are normalised to their values on 30th Aug 2022.
Initially, the number of units accumulated via SIP is small, and the movement is largely determined by the investment month after month. Once the value of the units accumulated is significant, the SIP returns depend 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 monthly instalments. Most people worry about filling the bucket when the market is shaky (when is it not?!) or when to add the next instalment.
They fail to realise that the bucket is on shaky ground. If the bucket falls, the SIP will always result in a loss, no matter how old. 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 filling water no matter what.
Using the SIP XIRR Tracker tool, we can plot the month-after-month annualised return.
Notice that the XIRR has been falling since the end of 2014!! A 20% return after 8-9 years was reduced to about 10% after 11 years a year ago. It recovered to 17% and is now recovered to 15%. The risk never decreases in the long term unless we actively manage it, and SIP will not help in any way! Bull market or bear market lessons on risk do not change!
If 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 a system is in place: A clear goal, a clear asset allocation, and 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 reduce risk in the portfolio. They are not mutually exclusive. To understand this better, you can start with this video: Basics of portfolio construction: A beginner’s guide.
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