Why you shouldn't worry about one-year SIP returns turning negative
Do not, under any circumstances, get persuaded by this temporary blip into stopping your monthly investments
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Investing in equity mutual funds through systematic investment plans (SIPs) has gained popularity among retail investors over the past couple of years. Despite the volatility in the markets during the current
financial year, mutual funds have added about 10.05 lakh SIPs each month, on an average. Monthly inflows through SIPs, in fact, hit an all-time high of Rs 79.85 billion in October 2018.
SIPs work on the principle of rupee-cost averaging. By investing a fixed amount every month, investors are able to buy more units when the net asset value (NAV) of the fund falls, and fewer units when the NAV rises, thereby averaging out their cost of purchase. However, equity investments made through the SIP route can also be volatile. The biggest mistake that investors can make when SIP returns turn negative is to stop their monthly investments.
Near-term returns have turned negative: Investors who began investing through the SIP route over the past one year are a disappointed lot today as returns have turned negative. For large-cap funds, the SIP return over the one-year period (ending on November 1, 2018, valuation date November 22, 2018) ranges from -1.29 per cent to -21.04 per cent. For mid-cap funds, the SIP return over the same period ranges from -3.81 per cent to -24.89 per cent. Investors should keep in mind that returns over shorter time frames often tend to be volatile. When investing in equity funds, investors should not get excessively swayed by one-year returns.
The last time the one-year SIP based on the S&P BSE Sensex turned negative was in April 2016. On the brighter side, over the past two decades, one-year SIPs were positive on 174 occasions out of 240 monthly observances. In other words, one-year SIPs have been positive 72 per cent of the times. Hence, periods when SIPs delivered negative returns have usually been short-lived. Over the same period, returns through a three-year SIP based on the Sensex were negative on just 13 per cent occasions. For five-year SIPs, the returns were negative on just 8 per cent of the total periods over the past two decades (this analysis is based on October 31, 2018 valuation). Thus, in equity investing, the longer you invest for, the better. So, do not worry about the short-term underperformance of your funds.
Long-term returns remain sound: For investors looking to create a corpus, say, for their child’s higher education, or for their own retirement, one-year underperformance is a mere blip. What matters is the return they are able to earn over the long term. And those numbers appear quite decent for Indian equity funds even today.
Over a 10-year period (last SIP date November 1, 2018, valuation as on November 22, 2018), large-cap equity funds have generated SIP returns that ranged from 7.61-14.26 per cent. The median SIP return was 11.18 per cent.
For midcap funds, the 10-year return ranged from 9.50-19.11 per cent. The median figure was 16.17 per cent. These are quite robust numbers. An investor who ran an SIP of Rs 1,000 over this 10-year period in a large-cap fund would have ended up with a corpus of around Rs 215,000 (using the median rate of return) while someone investing in a midcap fund would have ended up with a corpus of Rs 292,000. Thus, investors with a long investment horizon would have been suitably rewarded.
financial year, mutual funds have added about 10.05 lakh SIPs each month, on an average. Monthly inflows through SIPs, in fact, hit an all-time high of Rs 79.85 billion in October 2018.
SIPs work on the principle of rupee-cost averaging. By investing a fixed amount every month, investors are able to buy more units when the net asset value (NAV) of the fund falls, and fewer units when the NAV rises, thereby averaging out their cost of purchase. However, equity investments made through the SIP route can also be volatile. The biggest mistake that investors can make when SIP returns turn negative is to stop their monthly investments.
Near-term returns have turned negative: Investors who began investing through the SIP route over the past one year are a disappointed lot today as returns have turned negative. For large-cap funds, the SIP return over the one-year period (ending on November 1, 2018, valuation date November 22, 2018) ranges from -1.29 per cent to -21.04 per cent. For mid-cap funds, the SIP return over the same period ranges from -3.81 per cent to -24.89 per cent. Investors should keep in mind that returns over shorter time frames often tend to be volatile. When investing in equity funds, investors should not get excessively swayed by one-year returns.
The last time the one-year SIP based on the S&P BSE Sensex turned negative was in April 2016. On the brighter side, over the past two decades, one-year SIPs were positive on 174 occasions out of 240 monthly observances. In other words, one-year SIPs have been positive 72 per cent of the times. Hence, periods when SIPs delivered negative returns have usually been short-lived. Over the same period, returns through a three-year SIP based on the Sensex were negative on just 13 per cent occasions. For five-year SIPs, the returns were negative on just 8 per cent of the total periods over the past two decades (this analysis is based on October 31, 2018 valuation). Thus, in equity investing, the longer you invest for, the better. So, do not worry about the short-term underperformance of your funds.
Long-term returns remain sound: For investors looking to create a corpus, say, for their child’s higher education, or for their own retirement, one-year underperformance is a mere blip. What matters is the return they are able to earn over the long term. And those numbers appear quite decent for Indian equity funds even today.
Over a 10-year period (last SIP date November 1, 2018, valuation as on November 22, 2018), large-cap equity funds have generated SIP returns that ranged from 7.61-14.26 per cent. The median SIP return was 11.18 per cent.
For midcap funds, the 10-year return ranged from 9.50-19.11 per cent. The median figure was 16.17 per cent. These are quite robust numbers. An investor who ran an SIP of Rs 1,000 over this 10-year period in a large-cap fund would have ended up with a corpus of around Rs 215,000 (using the median rate of return) while someone investing in a midcap fund would have ended up with a corpus of Rs 292,000. Thus, investors with a long investment horizon would have been suitably rewarded.