Want solid returns? Motilal Oswal explains why 7-Yr SIPs are worth the wait

Be faithful in marriage and disciplined in SIP for at least 7 Years, tide over the itch. if you are going to do SIP for 7 Years, then might as well be with a proposition (Market Cap Segment)

When it comes to Systematic Investment Plans (SIPs), the first seven years can make a huge difference in your returns, especially in markets as volatile as small and mid-cap stocks. According to data analysed by Motilal Oswal, staying invested in SIPs for this duration could reward you handsomely, despite market uncertainties.

 

An analysis of SIP returns over the last 20 years, covering periods of major market events like the Global Financial Crisis (2008-09) and the COVID-19 slump, shows that investors who stayed the course generally saw positive results. In fact, the worst-case scenarios for a 7-year SIP in mid and small-cap stocks show a mere 5.8% probability of loss. 

The Motilal Oswal analysis is of

• 5 year SIP’s - Total 170 SIP Series of 5 years Each
• 7 year SIP’s – Total 155 SIP Series of 7 years Each
• 10 year SIP’s – Total 119 SIP Series of 10 years Each

The SIPs are assumed to have started on the 1st working day of each month. The returns depicted are calculated using XIRR at the end of the respective SIP periods, with the valuation based on the first working day of the month following the SIP period. 

  Key findings:  

Probability of Loss 7Y SIP - Mid Cap 0.0%. Small Cap 5.8% (Large Cap 0.6%). 

Out of 155 Monthly SIP series, only 9 Series of SIPs in Small caps ended the term at a loss. None of the SIPs in Midcaps ended in a loss. 

Worst Loss Smallcap -7.3%. An interesting observation is that the worst returns across all categories (Large Cap, Mid Cap, Small Cap, and Multi-Cap) and across 5-year, 7-year, and 10-year SIPs occurred in March 2020. 

"What’s important is at that time, instead of redeeming (Lock, Stock or Barrel or Otherwise ) if you would have stayed put for just 1 More Year without even continuing your SIP, your experience would have been extremely pleasant. Just like as they say, when in distress; sleep over it. Same way, just remain invested and tide over the market turmoil," noted the study. 

 

Key points to note:

• Mid-Cap Stocks: There were zero losses across 155 different 7-year SIP series.
• Small-Cap Stocks: Only 9 out of 155 small-cap SIPs ended in losses, with the worst return being a 7.3% negative return.
• SIP Probability of Loss: The likelihood of loss for small-cap SIPs is low, at just 5.8%, and for mid-cap SIPs, it’s 0.0%.
• Interestingly, even during the worst periods, like the market slump in March 2020, investors who held on for an additional year without adding to their SIPs saw positive returns.Lessons Learned

The key takeaway? Patience is critical. Just like in relationships, whether it's a marriage or an SIP, staying committed during the initial years often brings rewarding results. The data shows that the longer you stay invested, especially in mid and small-cap SIPs, the more likely you are to see healthy returns, with significant upside potential once the markets recover from temporary dips.