Even an SIP ‘laggard’ stumps debt long term

For once, you might think you would have been better-off had you stayed away from JM Equity Fund. This is so because returns-wise, the showing of the fund in the large cap category has been largely lacklustre, to say the least. But rest easy, it’s not as bad as you think. On the contrary, you would be pleasantly surprised that you have pocketed a gain of over 9%.

Maybe, this is better than the returns debt instruments such as fixed deposits, national savings certificates (NSC), public provident fund (PPF) would have fetched you otherwise. Just take a look at the systematic investment plan (SIP) returns for the past 10 years. And the numbers say it all. Barring JM, other ‘underperformers’ in the category have managed to stay above – can you believe it – the 10% mark.

If you are lucky enough and had gone with the top five on the list, your SIP returns would have been anywhere between a cool 18-23%. In simple terms, an investment of Rs2,000 in DSPBR Equity Fund every month from  November 1, 2002 to October 1, 2012 would see your total invested amount of Rs2,40,000 jump to as much as Rs7,67,996.

Analysts are in unison that for a retail investor, SIP is the best way to invest in equities. As the name suggests, you are investing systematically, so the question of timing the market doesn’t arise. But it may be noted that an equity investment is for the long haul.

However, the jury is still out on the long-term feasibility. Earlier, the time horizon while evaluating a long-term investment was limited to 3-5 years. But thanks to the recent market turmoil, the definition has become a little more elastic. But most agree that systematic investment plans over a period of time definitely yield better benefits. “If an investor had put in Rs2,500 each in Franklin India Bluechip Fund and Reliance Growth Fund via SIP on October 1, 1997, until September 3, 2012, then his corpus would have had become Rs30 lakh and Rs42 lakh, respectively,” says Renu Pothen, head, Fundsupermart.com.

Given the nature of the equity world, brace for ups and downs along the way. As Dhirendra Kumar CEO of Value Research, puts it: “You should not treat SIP as a magic wand. It’s an ideal way of investment for retail investors since it allows you to build a corpus over a period of time and mitigate the risk of lumpsum investment.”

To cite an example, you enter the market at high levels, but then it begins to correct. This means your investments are going to take a hit. But if you are in it for the long term, a hasty exit is not advisable. This is because when the markets are down, you have a chance to earn more units in the mutual fund. So, when the market bounces back, your returns are going to be significantly more. If you beat a hasty retreat, you are not only going to miss out on the benefits in the long run, but also probably exit at a time when the overall portfolio would have had shrunk.

The other self-evident aspect is  most equity funds have had given returns upwards of 15% over a period of 10 years, so it’s not a bright idea to select any fund on a random basis. Also, if your fund has been underperforming consistently, it may be prudent to say goodbye to it. But guard against making any hasty exits at any point of time. You should exit a fund if 1) your fund has underperformed its peers or its benchmark 2) it has altered its mandate or 3) after a change of guard, the fund has not managed to pick up.

In order to make the most of market volatility, mutual fund houses have come out with a whole host of flexible investment options through an SIP. These include Flexi SIPs, daily and weekly SIPs and even a market trigger option. In fact, ICICI Prudential AMC has now come out with a ‘Pause’ SIP option that allows you to stop your investments for one to three months. All the reason why you can stick with your investments.