With systematic investment plan (SIP) inflows in FY17 more than FII inflows, disciplined regular investing has suddenly gained more traction and attention. How did this phenomenon happen?
Things don’t happen overnight
The SIP investments for 2016-17 was at Rs 43,921 crore. And for the period till October 2017 (seven months of this fiscal ), SIP investments are at Rs 34,887 crore. For the same period last financial year, SIP investments were at Rs 23,584 crore. The SIP investments are reflecting the strength of the investor confidence in the financial instruments. This is also driven by the fact that returns in the other asset classes—gold and real estate, have given poor returns over the past many months.
SIP or lumpsum?
Now another thought is driving the investor’s mind. Is SIP or lumpsum investments the right way? As the Sensex and Nifty are moving up, there is a fear of correction. Market movements cannot be predicted. When the government announced PSU banks recapitalisation, stocks of state-owned banks rallied 10-50% overnight. So there is no right answer to what is the best approach.
Let’s look at data over multiple time periods in a diversified large cap fund and then decide what history has dished out.
Let’s consider three periods: First period – April 14-Oct 17 (43 months), second period – April 16- Oct 17 (19 months) and the third, Jan 2007- Oct 17 (10 years and 10 months) .
In the first period, if you had invested a sum of Rs 1 lakh lumpsum in a diversified large cap fund, the value as on Oct 31, 2017 was Rs 1.86 lakh ( a CAGR return of 19%). A SIP of Rs 10,000 per month in the same period delivered a return of 15.96% . The Sensex return were in the region of 19%. In this instance too, both the SIP and lumpsum investment returns beat the Sensex returns, with lumpsum, delivering a better return, overall. In the second period, if you had invested Rs 1 lakh lumpsum in a diversified large cap fund, the value as on October 31, 2017 was Rs 1.39 lakh (a CAGR return of 24%. On the other hand, a SIP of Rs 10,000 per month in the same period delivered a return of 21.87%. The Sensex return was 12%. In this instance, both the SIP and lumpsum investment returns beat the Sensex returns, with lumpsum, delivering a better return, overall.
In the third period beginning 2007, if you had invested a sum of Rs 1 lakh lumpsum in a diversified large cap fund, the value as on October 31, 2017 was Rs 4.32 lakh ( a CAGR return of 14.9%). A SIP of Rs 10,000 per month in the same period delivered a return of 15.89%. In this instance, the SIP returns were higher than the lumpsum investment returns. Let’s take another scenario. The period 2007– Oct 2008 witnessed the stock markets touching the zenith and then falling like ninepins. In that period, if you had allowed your emotions to control your investment behaviour and you had stopped the SIP and also withdrawn the investment, both in SIP and lumpsum, what would have been the investment status?
For Rs 1 lakh invested in lumpsum manner in a large cap fund, the value on Oct 19, 2008 was Rs 0.81 lakh and if you had not redeemed and allowed it run the course till 2017 (October), the value would have been Rs 4.32 lakh. Similarly, for the SIP investments of Rs 10,000 per month for the period Jan 2007 –Oct 2008, if you had stopped the SIP and redeemed, you would have ended with a loss of 38% over the 22-month period . However, if you had not redeemed and only stopped the SIP, the corpus would have grown to Rs 11.33 lakh with a CAGR return of 18%. More importantly, in the event you had continued the SIP, the corpus would have grown to Rs 31.90 lakh.
There is no set pattern. What is important is that you invest with a goal. Market timing is difficult and is a matter of luck many a times. SIP or lumpsum, what is important is the time horizon for investment and the emotional quotient you display.
The writer is partner BellWether Advisors LLP. With inputs from Siddhartha Prasai