Systematic investment plans deliver double market returns

BL Research Bureau | Updated on November 12, 2017

mutual_381021a.jpg   -  Business Line


Over the last three years the Sensex actually went nowhere on a point-to-point basis, yet could you have managed a 30 per cent annual return in this period?

Yes, simply by investing in mutual funds, in the popular Systematic Investment Plans (SIPs). SIPs have scored over investing lumpsum from 2008, when the market correction started, till date.

Investing regular sums every month in ICICI Pru Discovery Fund, for instance, would have given a handsome 36 per cent in the last three years through monthly SIPs. Had you invested a lumpsum three years ago, you would have had to be content with a mere 16 per cent gain.

Even an SIP started in the Sensex in March 2008 and continued till today would have delivered a 15 per cent return though the benchmark has fallen 1 per cent between these two dates (on a point-to-point basis).

Returns higher

A calculation of the SIP returns (through internal rate of return or IRR) for the top 25 equity funds, suggests that SIPs were a far superior option to investing one-time in each of these funds over the last three years.

Investments through SIPs garnered returns 10-20 percentage points higher than the lumpsum invested in all the 25 funds. SIPs allow investors to buy units of mutual funds by putting in small sums on a daily, weekly or monthly basis, through an automated process for a period chosen by investors.

Why SIPs worked

As an investment strategy, SIP has excelled over the last three years simply because this was an exceptionally turbulent period for stock prices. The deep plunge in stock prices in 2008 allowed investors who continued to buy mutual fund units to ‘average' their costs by buying additional units at lower prices. The choppy markets in 2010, too, ensured that additional units were bought at market dips, thus ensuring better returns. For instance, an SIP kicked off in HDFC Top 200 Fund would have allowed you to start investing at a NAV of Rs 141.8 per unit in March 2008, but as markets fell in 2009, the costs would have plunged as low as Rs 82 a unit in March 2009.

Top funds such as HDFC Equity or Quantum Long Term Equity and Birla Dividend Yield Plus, while generating market-beating annualised returns of 13-16 per cent over a three-year period, delivered even better returns through the SIP route, making a 30 per cent return.

Lifting fund performance

SIPs have not just enabled superior returns from top funds. More important, they ensured that investments in funds with mediocre performance did better, too. For instance, Reliance Growth expanded its NAV by merely 5 per cent compounded annually over three years. However, an SIP in the fund would have ensured you a 21 per cent return. This essentially means that investors do not have to worry much, even if they had invested in a middle-of-the road performer. They could still have managed returns that beat the markets by a good margin.

SIPs do not, however, work the same wonder in shorter time-frames of, say, one year.

An SIP in a rising market would mean buying every additional unit at a higher cost. HDFC Equity, for instance, would have delivered a mere 2.8 per cent over the last one year through a monthly SIP, whereas a lumpsum invested a year ago in the fund would have delivered a superior 21 per cent.

Published on February 05, 2011

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