Equity Fund SIPs: To persist or not to persist?

Let us look at how equity SIPs have performed over different time frames in the last 16 years since the structural bull rally first started in 2003.

Sep 05, 2019 11:09 IST India Infoline News Service

One of the essential tenets of systematic investment plans (SIPs) has always been to persist over the long term. The typical pitch you will get to hear is that equity SIPs can only generate returns in the long run. In the last few weeks, there have been a number of news reports of how SIPs have underperformed in India over the last 1 year. To understand the narrative, let us look at how equity SIPs have performed over different time frames in the last 16 years since the structural bull rally first started in 2003.
 
For our analysis we have considered HDFC Top-100 Fund since it has a long presence in the Indian markets and represents one of the largest AMCs in terms of AUM. To give a better picture, we considered only Growth Options of Regular Plans since Direct Plan data is only available from Jan-13 onwards. Let us look at 6 distinct SIP scenarios.
 
Scenario 1: Started equity SIP in Jan-03 and reviewed in Dec-07
SIP Start Amount SIP Evaluation Amount
SIP start month Jan-03 Total Contribution Rs.3,00,000
SIP end month Dec-07 SIP End Value Rs.28,96,470
Monthly SIP Rs.5,000 SIP IRR (%) 17.07% per year
Invested in HDFC Top-100 (G)
Data Source: Value Research
 
Here is the awfully lucky investor who got in at the start of the structural bull-run and evaluated his SIP performance just before the rally peaked out in January 2008. Returns at 17.07% annualized are absolutely fantastic optically. But you are bound to be disappointed if you compare these returns with the returns on a lump-sum investment in the same fund or had you bought any of the high flying infrastructure stocks during the period. You have done exceedingly well but you are likely to feel let down if you compare yourself with a lump-sum investor in the same fund.
 
Scenario 2: Started equity SIP in Jan-03 and reviewed in Jul-19
SIP Start Amount SIP Evaluation Amount
SIP start month Jan-03 Total Contribution Rs.9,95,000
SIP end month Jul-19 SIP End Value Rs.42,90,534
Monthly SIP Rs.5,000 SIP IRR (%) 15.69% per year
Invested in HDFC Top-100 (G)
Data Source: Value Research
 
Here is the true blue long-term investor who has held on to the SIP over the last 16 years and is sitting pretty on annualized returns of 15.69%. That is quite flattering if you compare with the first scenario where the returns are not substantially better despite catching the top and the bottom of the market precisely. In Scenario 2, the investor has been through a tumultuous 16 years which includes the bull rally, fall of Lehman, European crisis, trade war, weakening growth in China and a lot more. Despite all these vagaries, the SIP has given impressive returns over the last 16 years. That is the perfect passive narrative.
 
Scenario 3: Started equity SIP in Jan-06 and panicked Mar-09
SIP Start Amount SIP Evaluation Amount
SIP start month Jan-06 Total Contribution Rs.1,95,000
SIP end month Mar-09 SIP End Value Rs. 8,13,264
Monthly SIP Rs.5,000 SIP IRR (%) 12.48% per year
Invested in HDFC Top-100 (G)
Data Source: Value Research
 
This would be the typical retail investor who got into the SIP in 2006 when retail euphoria was at its peak and got out in panic when pundits were predicting the end of Indian equity markets. However, the returns are actually quite impressive at 12.48%. That is due to the sharp bouts of volatility during this period and the ability of SIP to make the best of such market volatility. That is, perhaps, what has stood the SIP in good stead! Of course, 3 years is a short time to evaluate SIP performance but it surely underlines the ability of SIP to handle volatility better than lump sum investing.
 
Scenario 4: Started equity SIP in Jan-08 and reviewed in Jul-19
SIP Start Amount SIP Evaluation Amount
SIP start month Jan-08 Total Contribution Rs.6,95,000
SIP end month Jul-19 SIP End Value Rs.13,94,064
Monthly SIP Rs.5,000 SIP IRR (%) 11.28% per year
Invested in HDFC Top-100 (G)
Data Source: Value Research
 
What if you had started your SIP at the peak of the previous rally in January 2008 and continued through the next 11 years till date? During this period, the annual CAGR return on the SIP would have been a relatively impressive 11.28%. This may not sound very great but if you compare with the lump-sum point-to-point return that would have been a little over 4%. In comparison, your SIP returns are certainly impressive. This again underlines the importance of a long term SIP over lump sum investing.
 
Scenario 5: Started equity SIP in May-14 and reviewed in Jul-19
SIP Start Amount SIP Evaluation Amount
SIP start month May-14 Total Contribution Rs.3,15,000
SIP end month Jul-19 SIP End Value Rs.3,77,587
Monthly SIP Rs.5,000 SIP IRR (%) 6.61% per year
Invested in HDFC Top-100 (G)
Data Source: Value Research
 
What if you had started the SIP when Mr. Modi took charge in May 2014? Had you held it till today, what would be the returns? The SIP would have returned a sub-par 6.61%. There could be two reasons for this return. Firstly, during the last 5 years the rally has been concentrated only in few stocks and hence a Top-100 fund would have typically seen a lot of value negation via losing stocks.
 
Scenario 6: Started equity SIP in Apr-18 and reviewed in Jul-19
SIP Start Amount SIP Evaluation Amount
SIP start month Apr-18 Total Contribution Rs.80,000
SIP end month Jul-19 SIP End Value Rs.77,483
Monthly SIP Rs.5,000 SIP IRR (%) (-3.95%) per year
Invested in HDFC Top-100 (G)
Data Source: Value Research
 
Finally, what if you had started the SIP after the 2018 budget and held on till date. Despite it being a short period of time, the returns would have been a negative -3.95%. This was the midst of the liquidity crunch and rupee weakness. During this period, you would have been disappointed with SIP returns (although you would have still been better off than being invested in specific stories like mid-caps, autos, steel, etc.).
 
SIPs – To persist or not to persist?

What are the key takeaways from the above scenarios of SIPs?
  • Over a longer period of time of over 10 years, equity SIPs do work well irrespective of the starting and ending levels of the Nifty.
  • SIPs can be quite misleading in the short run and ideally that is not the right way to evaluate SIPs.
  • SIPs work much better when markets are volatile compared to when markets are flat since volatility ensures lower cost of acquisition.
  • Over a longer period of time, the relative advantage of timing is limited as we can see from comparison of Scenario 2 versus Scenario 1.
  • The basic narrative of SIP remains the same, i.e. identify a good fund, persist over the long term and let the power of compounding work for itself.

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