Better returns generated by staying invested than timing the market: Study

Amongst all our equity indices, the smallcap index has given the highest two-year SIP returns rising above 75 per cent

Indian investors who prefer to stay invested during the volatile period in the equity market will get handsomely rewarded. The recent note by IDFC Mutual Fund (MF) shows that investors who didn’t redeem during the tough time in the market and continued with their systematic investment plans (SIPs) have generated double digit returns.

If an investor would have started SIP in a S&P BSE 100 TRI, in August 2019 and stopped in July 2020 then the SIP returns as of July 2020 would have been 8.2 per cent. However, if the SIP was continued for another year till July 2021, then the SIP returns have posted returns of 34.2 per cent over a two-year period.

Amongst all our equity indices, the smallcap index (S&P BSE Small-Cap TRI) has given the highest two-year SIP returns rising above 75 per cent. “Data indicates that, investors who showed patience during the tough times by not redeeming from equity markets but continuing to invest via SIP significantly benefitted, as all main indices have turned from negative to positive and generated double-digit returns over both 2-year and 3-year periods,” said Sirshendu Basu, head products at IDFC MF.  

Similarly, if the SIP was continued for another year; all the indices generated double-digit returns over three years. Two-year SIP return on S&P BSE 250 Large & Midcap TRI index as on July 2020 stood at 2.3 per cent, while it increased to 25.5 per cent as on July 2021. In the three-year period ending July 2021, smallcap index gave returns of 46.2 per cent followed by midcap index which was up by 31.6 per cent.

In March 2020, Indian equities fell sharply due to the rising Covid-19 cases in India coupled with poor global outlook because of the pandemic, and stringent lockdown to contain the spread of the virus. However later market bounced back and posted strong returns in subsequent months.

With equity markets continuing to rise, several investors pulled out money from equity funds. In the period between July last year and February 2021 equity funds had seen net outflows of over Rs 46,700 crore.

“As equity markets were on an upward trajectory in CY20 post Covid-19 pandemic induced fall in March 2020, investors turned cautious and were redeeming from equity funds at every higher level. Since the rally was sharp and market sentiment was weak, investors chose to sit on the sidelines,” said ICICI Direct Research.

Market participants say that investors should always have long-term view while investing in equity as long-term returns are better compared to short-term returns. In the last one year, largecap funds have on an average given returns of 44.85 per cent, while in the 10-year it has managed to give returns of around 14 per cent. Similarly, the midcap and smallcap funds have given average returns of 18.35 per cent and 19 per cent respectively in the 10-year period.

“Many investors try to time the market and exit when there is sharp correction and enter when there is euphoria in the market. Instead, they will be better off if they continue to invest for ten years or more and get superior risk adjusted returns,” said a top official from the MF industry.