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