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When will SIP in mutual funds not work?


‘The best way for a retail investor to participate or invest in equities is through SIP in mutual funds’ — We have always heard this from the financial planners and we believed it to be true as well till, almost last two years when most SIPs generated zero and negative returns. For all of us who have not witnessed the markets crash in 2008 as investors, the poor performance of mutual fund SIPs is a new thing. So, what next? Should we stop our SIPs? Get directly into stocks? Continue our SIPs? Watch the SIP performance for some more time before taking a final decision? Kalpen Parekh, President, DSP Mutual Fund has a one line answer –

“When equity markets do very badly, SIPs will also underperform. Always ask & learn – when will it (mutual fund SIP) not work?,” Parekh wrote in a Twitter post.

Let’s see what numbers say. At present, 34 out of 210 equity schemes gave zero to negative SIP returns in the last five years. 172 schemes generated single digit returns SIP returns. Similarly, if we look at the 5-year SIP returns ended 2017, the average SIP return in equity funds was around 17%. We saw many mutual funds schemes giving much higher returns of 30% as well.

Thus the data also shows that SIPs do not work in bad times. Does it mean all the money you invested in the last five years to earn decent double-digit returns go waste?

Well, No. That’s not true. The concept of SIP was designed to average out the cost of purchase through systematic and regular buying of units in a mutual fund. The fundamental idea is to ‘not time the market’. Hence it does not make any sense to withdraw or stop your investments through SIP now.

Kalpen Parekh shared his personal experience on twitter. He wrote,”I personally have benefited from SIP. My SIPs buy units at lower NAVs, that left to myself I would have not. Flip side – it buys at higher prices too.”

Parekh shared an interesting data set on his twitter. The data shows rolling-returns of the benchmark index BSE Sensex since its beginning. A rolling return is the average of a series of returns of an investment over a long period of time. It is like a daily SIP for a long time period and then taking an average of the series of returns. Rolling returns over a long period of time capture various market cycles and is very reliable.

Parekh shared a table showing the rolling returns of BSE Sensex since its inception on April 3, 1979 till June 30, 2020. The table proves that the chances of negative returns continue to fall as we increase the investment tenure. According to the data, BSE Sensex has never given negative returns in any of the 15-year periods since the launch of the index.

Also, BSE Sensex has given more than 12% returns in 80% of all the ’20-year’ periods since the inception of the index.

Here’s the tweet:

Kalpen Parekh shared the same data table on July 28 and he wrote,” 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.”

Here’s the tweet:

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Hi guys, this is Kimmy, I started LicensetoBlog to help you with the latest updated news about the world with daily updates from all leading news sources. Beside, I love to write about several niches like health, business, finance, travel, automation, parenting and about other useful topics to keep you find the the original information on any particular topic. Hope you will find LicensetoBlog helpful in various ways. Keep blogging and help us grow as a community for internet lovers.