CEO Speak

It was raining incessantly, and Mumbai being Mumbai during monsoons, it was advisable to stay indoors that day as dysfunctional roads which had turned into waterways and stopped local trains made it pretty much impossible for Mr SIPpy to get to office. So this was that opportune day when he sat sipping his hot masala chai and bhajjiyas and reviewed his investments.

Going through his details he chanced upon one SIP (Systematic Investment Plan) in a diversified equity fund which he had made almost 20 years and had almost forgotten about it. He was 23 years old then in 1999, in his first job when he had started this SIP and since then it had continued as he never had the need of withdrawing the money. And now he had a very healthy corpus, which will be sufficient to fund his daughter’s education in the UK.

What went right with Mr SIPpy and his SIP investment?

Of course primarily that he started investing early and regularly. However, to understand this we need to quickly recap what all happened in the last 20 years which impacted the markets.

  • In 1992, Sensex level was 4,500 and in 2001, Sensex levels was 2,600
  • In a span of 5 years starting 2003, Sensex travelled from 2,900 to 21,000 in early 2008, a growth of 600% within 5 years
  • Global crisis (Lehman Brothers debacle) of 2007-08 saw its sharpest fall from 21,000 to 8,000 levels in 2008 and early 2009
  • Post 2009, economies witnessed significant recovery and saw pullback rally. So the market which recovered from 2009 from 8,000 levels break through the 2008 prices of 21,000 in 2014 where we see the bull market to continue till 33,000 levels in 2017

Over and beyond these there were multiple events when the Sensex went up or nosedived sharply over a very short period of time. However, Mr SIPpy managed to get a return of over 15%*on his SIP investment over the last 20 years. You know why?

*Well diversified equity funds over the last 20 years have given more than 15% CAGR.

The main reason was that he did not get tempted to withdraw when the markets were falling. He knew he was in a well diversified scheme and that he didnot need the funds, so he never panicked when the markets were plunging and did not over react when the markets were in a bull run.

Here’s another piece of data which goes to prove that investing in an SIP over a longer period of time tends to give healthy returns.

Period Returns
31/01/2000 to  31/05/2003 0.0%
31/01/2000 to 31/05/2004 10.7%
31/01/2000 to 31/05/2005 19.2%
Period Returns
31/01/2011 to 31/01/2012 -4.6%
31/01/2011 to 28/02/2013 5.5%
31/01/2011 to 31/12/2014 17.8%

The above mentioned illustration is based on same SIP in a diversified equity fund over a period of 3, 4 and 5 years.

Source: MFI; Returns calculated based on XIRR; returns has been calculated on the PRI version of S&P BSE Sensex.

We can clearly see in the above table that when investing regularly over a longer period of time, one might see some years giving 0% or –ve returns, one good year thereafter, averages out the notional losses and tends to give a healthy return which is otherwise not possible in traditional financial instruments. One must review their investment portfolio time and again, but review does not mean redeem. Stick to your financial goal, basis which you had started the SIP in the first place and then try and curb your emotions on temporary or short term volatility of the markets and stay focussed on the long term goal.

That’s what Mr SIPpy did right with his SIP investments. One must not lose their patience when invested for long term. Happy Investing!

Disclaimer – This document is for general information only and does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this information. Investments in mutual funds and secondary markets inherently involve risks and recipient should consult their legal, tax and financial advisors before investing.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.