Continue SIPs for long-term gains

Exiting them in a downturn will hurt existing investments as well

Retail investors in the stock markets are quite dismayed with the conditions. With the Bombay Stock Exchange Sensitive Index, or Sensex returning barely 3.13 per cent in the last five years, there is little money to be made in the markets.

No wonder, retail investors have either closed systematic investment plans (SIPs) or not renewed them or simply stopped making their monthly payments.

According to data from the Securities and Exchange Board of India (Sebi), the number of folios as on July 2012 stood at 36.6 million. And the industry lost over 8,000 folios a day during this financial year. According to recent reports, the number of SIPs has hit a 16-month low.
 

NO NEED TO STOP SIPS
SIP amount	Rs 5,000 since September 2007
Scheme name	DSP BlackRock Top 100 (Equity) and/or  HDFC Equity Fund
Total investment  (till July 2012)	Rs  2.95 lakh
Total corpus	Rs 3.56 lakh in DSP BlackRock, Rs 3.85 lakh in HDFC Equity Fund
Rate of return  (annual)	7.67 % (tax-free) for DSP BlackRock,  10.88% for HDFC Equity Fund (tax-free)
Loss if exited  midway  (in March 2009)	25.14 % in DSP BlackRock,  32.18% in HDFC Equity Fund
Returns from debt	6-8% (5 years)
Tax on returns	10% with inflation, 20% with inflation
Returns on gold ETFs	26% (5 years)
Tax on returns	10% with inflation, 20% with inflation
Average Inflation  (WPI)	7.2% (5 years)
Average Inflation  (CPI)	9.2% (5 years)

Amar Ranu, senior manager, Third Party Products, Motilal Oswal Wealth, says a big reason for the exits was that retail investors felt making money in equity markets would be difficult. “Therefore, they shifted to other investments such as bank fixed deposits,” adds Ranu.

But investors who have taken this step have lost some serious money. Say if you had started an SIP of Rs 5,000 per month in September 2007 in a large-cap fund like DSP BlackRock Top 100 equity, today you would be sitting on a corpus of Rs 3.56 lakh (as on July, 31).

Of this, your investments would be Rs 2.95 lakh and rest Rs 61,000 would be capital gains. The rate of return is 7.67 per cent per annum. And that too, tax fee as you have completed one year.

In comparison, debt would have returned six-eight per cent annually, but there is a tax on capital gains, 10 per cent without inflation indexation and 20 per cent with indexation. So, the returns would come down by another percentage point.

Gold exchange-traded funds (ETFs) are the only instrument that would have beaten these returns at 26 per cent annually, but the taxation is similar to debt. So, despite the slowdown, staying invested in an equity fund would have given reasonably decent returns. In fact, investing Rs 5,000 monthly in a slightly-aggressive fund – HDFC Equity Growth – a multi-cap fund, one would have earned 10.88 per cent annually.

The average inflation rate – wholesale price index – was at 7.2 per cent in the last five years whereas the average consumer price index has been 9.2 per cent in the same period. In other words, the rate of return from SIPs in good schemes would have beaten the inflation rate, in some cases, substantially.

On the other hand, say you got scared when the markets crashed in 2008-09 by 38 per cent and exited the SIP in March 2009, you would be sitting on a huge loss. That is, if you exited the SIP in March 2009, your corpus would be Rs 75,940 in case of DSP BlackRock Top 100 equity scheme – down 25.14 per cent (on investment of Rs 95,000). Similarly, in case HDFC Equity Growth, the corpus would have suffered further – down by 32.18 per cent.

Like Hemant Rustagi, chief executive officer, Wise Invest Advisors, says, “Looking at the year-on-year return for an equity investment can hurt. You should not invest in equity unless you have a definite time horizon for your investment, that is, at least more than five years. Otherwise you will not be prepared to wait out the volatile time period.”

While investing through SIPs in a rising market, people don't realise that every installment is buying lesser units of the scheme because the net asset values (NAVs) are high. In a falling market, however, investors will benefit more because they are getting more units at the same installment because of lower NAVs.

So, instead of taking decision based on present market conditions, it’s better to take a long-term view and keep investing. The returns will take care of themselves.