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April 29, 2020

Don’t let Covid-19 cut short your SIPs

Stay focused on the long term, for as market cycles go, this too shall pass

The market volatility brought on by the Covid-19 pandemic may have blurred visibility for investors around the world, but an old adage rings true now more than ever – fortune favours the brave. And for investors in systematic investment plans (SIPs) of mutual funds, the intrepid move would be to stay the course than waver. Indeed, a CRISIL analysis shows that despite the weak or negative returns seen in five- to seven-year SIPs recently, pulling out at this stage would be counterproductive. Stretch the investment horizon to more than 10 years, and prospects brighten for optimum returns.

 

It is gloomy out there…

 

As things stand, SIP investors in equity funds1 face the likelihood of erosion of capital for investment horizons up to five years, with returns in the range of -44% for one year and -7% for five years through March 31, 2020. The current crisis isn’t the first, and won’t be the last. Rewind to 2008-2009, when the global financial crisis had the world in its stranglehold. Or the dotcom bust of 2001. Both events saw extended bouts of volatility with similar negative SIP returns.

 

Long-haul play pays

 

Despite the intermittent dips, shadowing bear market phases, SIP returns (read market value for an investor) rise over the longer horizon, multiplying the corpus value. (See the chart besides) As per CRISIL’s analysis, an SIP investor who stayed invested from April 1997 to March 2020, ended up with 15% annualised returns2. Sample the bounty – an investment of Rs 27.60 lakh (assuming Rs 10,000 per month) would have grown to over Rs 2 crore at the end of this period.

 

Indeed, CRISIL’s analysis of SIP investments across equity categories since 1997 reveals that the probability of positive returns increases as the investment horizon increases. Our analysis shows that 44% of the times, one-year SIPs have returned less than 10%. However, as the tenure increases the probability of negative returns reduces to zero. Similarly, the minimum return for a one-year SIP rises from a low of -58% to a positive 4% over a 10-year horizon and increases to a respectable 13% over a 20-year term.