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Mutual Funds - SIPs Stand the Test of Time, Beat Sensex in 5-year Race

28 Sep 2012

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While Sensex offered 7.5% returns, SIPs, on an average, have fetched 15% returns since Sept 2007

Investing in mutual fund equity schemes through systematic investment plans (SIPs) has yielded better returns for investors than lump-sum unit purchases in these products. Buying equity scheme units through SIPs, which involves pre-determined periodic purchases of units over a period of time, every month in the past five years has fetched 10% to 18% annualised returns.

In comparison, a lump-sum investment of the same amount five years ago in these products has fetched 4% to 6% annually. Over 122 of the 160 multi-cap diversified equity funds with over five years of track record have delivered abetter internal rate of return (IRR) — a method of calculating daily SIP returns — than benchmark indices, as per data sourced from Value Research. The 30-share Sensex has generated a three- and five-year IRR of 4.4% and 7.5%, respectively. The index has fetched 11% and 13.2% compounded returns for three and fiveyears, respectively.

“SIPs eliminate the human bias. It encourages investments at all times, irrespective of the market levels. Investors will pocket good gains if they invest in SIP of funds with a good track record,” said Sundeep Sikka, chief executive of Reliance Mutual Fund. For instance, if an investor puts . 1,000 every month in SBI Magnum Emerging Business Fund — the best performer among all equity funds in the past five years — for five years (. 1,000 x 60 months = . 60,000), he would have been sitting on approximately . 1 lakh today, which amounts to 21% returns. “SIP investments average out market volatility by a good measure. Also, it prevents investors from trying to time the market.

We’re promoting SIPs in a big way as it enables small investments at regular intervals,” said Srinivas Jain, chief marketing officer of SBI Mutual Fund. Similarly, an investment of . 1,000 every month (between September 24, 2007 and September 21, 2012) in ICICI Prudential Discovery Fund, Reliance Equity Opportunities Fund and HDFC Mid-cap Opportunities would have earned 20%, 19.2% and 18%, respectively. The . 60,000 invested in the three funds over a fiveyear period would now be . 96,744, . 96,135 and . 93,530 respectively. SIPs tend to do well even in times of market underperformance as the (fund) pool is deployed at most market levels, thereby averaging out unit purchases at all price points. “SIP portfolios must have gone through the dips — buying more stocks as prices declined. Volatility also helps SIP portfolios in a big way.

Funds that have managed to withstand the market fall have delivered better SIP returns,” said Dhruva Raj Chatterji, senior research analyst, Morningstar India. Investors get more units for the same amount of money in falling markets. The units bought at lower price levels will appreciate when the market turns around, adding to the overall portfolio value. The variance in the performance of SIP and lump-sum (or onetime) investments is mainly due to the fact that SIP investors would have picked up additional units during the downturn.

Source: ET BACK