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August 29, 2019

Decade-old journey, paying dividends SIP by SIP

CRISIL Fund Insight celebrates its 100th anniversary this month. We embarked on this journey – to provide lucidinformation on mutual funds and financial planning in a concise format – about a decade ago. Looking back, we canassuredly say that we have done just that. In our endeavour to educate the readers, we covered a myriad of relevanttopics, systematic investment plans (SIPs) being a regular feature. SIPs’ popularity among retail investors hasencouraged us to write about it again in our 100th edition. Record SIP inflows of Rs 2.37 lakh crore from April 2016 (when the Association of MutualFunds of India started disclosing data) to July 2019, fueled the mutual fund industry’s increase in assets under management (AUM) to ~Rs 12 lakh croreduring the period.


Systematic investment has reaped returns


Systematic investments allow investors to eliminate the risk of market timing, average the cost per unit and add discipline to investments over the long term. This investment has paid dividends for investors over the decade. For this analysis, we compared SIP returns with lump sum over various market phases in the past decade and then the final returns at the end of the overall period. We extended the period of analysis to before the start of the financial crisis in January 2008, a time when investors had extended their focus to mutual funds before losing interest due to the ensuing crisis.


Our analysis reveals that investments in SIP have done better than lump sum returns in most bear phases. For instance, during the sub-prime crisis, when the global markets toppled ~44%, SIP investors’ negative returns were limited; so also during the European crisis. Even during the bull phase, there have been instances (post European crisis) when the markets went oscillated before trending up, and SIPs benefitted more than lump sum.


The clinching deal for SIPs came in the cumulative period since 2008 when point-to-point CAGR returns come out just around 5% versus XIRR returns of nearly 10% through the systematic route, thus showcasing the dividend of disciplined and regular investments by investors. Investors can optimise SIPs over the long run, helping reduce risks from volatility in the underlying market and shoring up returns.