Continue SIPs for eight years to avoid loss in equities, say experts

Neither day of the month nor frequency of SIP has a material impact on returns

Investing via systematic investment plans (SIPs) has caught on in recent years. 

According to the Association of Mutual Funds in India data, monthly inflows into mutual funds (MFs) via the SIP route have grown from Rs 3,698 crore in September 2016 to Rs 12,976 crore (with 58.4 million accounts) in September this year.

Notwithstanding the popularity of SIPs, investors tend to have many questions about how best to structure them.

When to invest

One common question pertains to the most suitable date of the month for investing in SIPs. To answer this, WhiteOak Capital MF studied the returns of the S&P BSE Sensex Total Return Index (TRI) between September 1996 and September this year. It calculated the 10-year average SIP returns on a daily rolling basis. It found that the date of the month did not have a material impact on the rate of returns. Irrespective of the date chosen, the 10-year average SIP returns came to 15.7-15.8 per cent.

“A salaried person should choose an SIP date that is within a few days of his/her salary getting credited into his/her bank account,” says Deepesh Raghaw, founder, PersonalFinancePlan, a Securities and Exchange Board of India-registered investment advisor.

How frequently to invest

Fund houses initially allowed monthly SIPs, but later began to offer daily and weekly SIPs. The WhiteOak Capital MF study (for the same index and period) found that the frequency of investment didn’t matter.

The returns were very similar, irrespective of whether the investments were made daily, weekly, or monthly.

Ideal investment horizon

Another common question is regarding the minimum horizon for which an equity fund SIP should be run. The WhiteOak Capital MF study (for the same index and period) found that if you had invested for three years, you would have earned positive returns in 83 per cent of the rolling returns period.

If you had invested for five years, you would have earned positive returns in 91 per cent periods. However, an investor who increased his investment horizon to eight years and above would have earned positive returns in 100 per cent periods. The median return also improved with increasing investment horizon.

Remember that time in the market is more important than timing the market. 

“SIPs do a better job of compounding returns if one stays invested for the long term,” says S Sridharan, founder and principal officer, Wealth Ladder Direct.

Market capitalisation that yields best SIP return

Investors often ask whether they should invest in large-cap, mid-cap, or small-cap funds. While large-caps are more stable, the mid- and small-cap segments have the potential to deliver higher returns over the long term.

WhiteOak Capital MF calculated the 10-year SIP returns on a monthly rolling basis for the Nifty 100 TRI, Nifty Midcap 150 TRI, and the Nifty Smallcap 250 TRI between April 2005 and September this year. The median return came to 12.5 per cent, 16.5 per cent, and 14.2 per cent recently.

Before you rush to invest in a mid-cap fund, consider a few points.

Says Nitin Rao, head-products and proposition, Epsilon Money Mart: “Investors should invest in line with their risk profile and investment horizon.”

“If you can invest for five years, choose a well-established large-cap fund. If your horizon is seven-year-plus, invest in a mid-cap fund; if it is 10-year-plus, go for a small-cap fund,” says Sridharan.

Since mid- and small-cap funds tend to be more volatile than large-cap funds, invest in the former only if your risk appetite permits. An investor with a moderate risk appetite may have a 70:20:10 allocation to large-, mid-, and small-cap funds. Those with a higher appetite may allocate more to the mid- and small-cap categories.

Handle volatility better with SIPs

Finally, the biggest reason for taking the SIP route should be that the rupee-cost averaging enables investors to handle both the risk associated with market levels and market volatility better. 

“Since the investments are spread over a period, the average cost of investing comes down mainly because you get more units when the net asset value of the fund is down, and vice versa. The investor is able to average out risk,” says Prateek Pant, chief business officer, WhiteOak Capital MF.