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Does Time Matter? Hint: The Longer The Better

“Don’t watch the clock; do what it does. Keep going.” – Sam Levenson, American TV host and journalist.

What is a SIP?

We all know the benefits of a regular workout regime, discipline with eating and sleeping, etc., but we also know how hard it is to maintain the disciplined approach. Being disciplined with money and investments is no different.

Systematic Investment Plans (SIPs) enable investing a pre-determined amount in a mutual fund scheme at pre-determined regular intervals (monthly or quarterly, etc.) in an automated manner.

SIPs are one of the best ways to deal with market volatility. When markets go up, the overall portfolio value increases. When markets correct, with the same instalment amount, an investor is able to buy more units due to the lower price. 

SIPs may help to create wealth over time, but understand the downside to SIP returns in a worst-case scenario.

“Most people overestimate what they can do in one year and underestimate what they can do in ten years.” – Bill Gates

The biggest advantage of a SIP is that it brings discipline and forces investing and may aid in long-term wealth creation. However, SIPs are not magical investments that work in every scenario. Markets fluctuate, and markets do fall. Short-term price fluctuations can’t be eliminated, especially with equities as an asset class. Stay patient and attempt to ignore these fluctuations. They are a basic characteristic of markets and investing. Let’s understand worst-case scenarios and see how SIPs in equity funds can potentially provide returns over a longer investment horizon. Long-term investments in equity SIPs cancel out short-term market volatility.  

Rolling returns since inception of BSE Sensex (i.e. 03 Apr 1979 till July 31, 2021)

Note how the drawdowns (declines in an investment or a fund) reduces over time and turns positive over the longer term.

Return expectations from SIPs - The Journey IS LONG!

Jeff Bezos, Founder, Chairman, CEO and President of Amazon and also one of the richest men in the world, asked Warren Buffet, “Your investment thesis is so simple. Why doesn’t everyone just copy you?” Warren Buffett responded, “Because nobody wants to get rich slow.”  

One rule of thumb. SIPs are not a formula to become rich quickly. SIPs utilize a simple, boring process that may help create wealth over the long term. In the short run, there are many factors that can affect the performance of the markets. Over the longer term, SIP returns generally follow overall economic growth. Short-term cyclical fluctuations tend to get ironed out over a longer term. Stretch the investment horizon to more than 10 years, and it may brighten prospects for optimum returns.  

SIP Tenure
% of times returns are
Negative Between 0-8% Between 8-12% > 12%
1 year 28% 12% 5% 55%
2 years 22% 14% 9% 55%
3 years 15% 19% 12% 53%

5 years

9% 17% 20% 54%
7 years 8% 15% 21% 56%
10 years 5% 8% 26% 61%
12 years 1% 11% 25% 62%
15 years 0% 5% 24% 71%
17 years 0% 0% 18% 82%
20 years 0% 0% 20% 80%

Rolling returns since the inception of BSE Sensex: Risks in a SIP (i.e. 03 Apr 1979 till July 31, 2021). Source: MFIE

One can see from the table on rolling returns since the inception of BSE Sensex that as the investment time horizon increases, there is a higher probability of earning positive returns.

FYI: Investors can use SIP calculators to estimate the returns they could have earned on their SIP investment. 

Risks in a SIP

By design, SIPs may help to avoid market volatility. But they do not eliminate risk completely. SIPs can help distribute risk.

There have been periods in the past where SIP returns have been low to negative for long periods. Let’s understand from a total returns perspective - if an investor continued her investment even when SIPs delivered negative or zero returns over a five-year period, how would she have fared?

BSE Sensex SIP Returns: 

 
Scenarios
If SIP is continued for
2 years 5 years 7 years 10 years
% of times total SIP returns are:
Negative 13% 5% 0% 0%
Between 0-8% 33% 15% 3% 0%
Between 8-12% 23% 13% 33% 18%
Greater than 12% 33% 68% 65% 83%

Source: MFIE. Data as on 31 July 2021.

 

Note that over a 10-year period, SIP returns were greater than 12% almost 83% of the time. This goes on to strengthen the cause that an investor needs to have faith and patience to stay invested EVEN and  ESPECIALLY during times of negative and zero times to enjoy the long-term potential of SIPs.

When should one stop a SIP? 

Never. As long as one is working and earning, we recommend SIPs should continue. Aim to increase investments along with income growth. Don’t break the power of compounding. SIP amounts can be modified (increased and decreased) due to a change in goals, life circumstances, income, and to adjust asset allocation.

Markets Fluctuate, Emotions Fluctuate, Keep SIPPING!!

We as human beings get swayed by complex ideas. SIPs are a simple idea of investing a fixed sum of money at regular intervals and not getting swayed by emotions. SIPs by design inculcate investing discipline in investors and may keep fear and greed in check. 

When the overall value of mutual fund investments declines during a market downturn, don’t pause SIPs out of fear. When the market is down, investors can take advantage of the opportunity to reduce the total cost of investment by continuing SIPs. When the market picks up, the entire portfolio may rise. 

SIP investors should not get swayed by events and market noise. Events such as elections, budgets, trade-war, pandemics, slowdowns, high growth, recessions, rising markets, market corrections, etc., will be a part of the journey.

Key Takeaway: Investors need to have perseverance, faith, and patience to stay invested even when fear wants to prevail to enjoy the long-term potential of SIPs.

 

Disclaimer

This note is for information purposes only. In this material DSP Investment Managers Pvt Ltd (the AMC) has used information that is publicly available and is believed to be from reliable sources. While utmost care has been exercised, the author or the AMC does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers, before acting on any information herein should make their own investigation & seek appropriate professional advice. Any sector(s)/ stock(s)/ issuer(s) mentioned do not constitute any recommendation and the AMC may or may not have any future position in these. All opinions/ figures/ charts/ graphs are as on date of publishing (or as at mentioned date) and are subject to change without notice. Any logos used may be trademarks™ or registered® trademarks of their respective holders, our usage does not imply any affiliation with or endorsement by them.

 

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