5 years on, MF SIPs hold their own

Mumbai: True, the stock markets have been battered and investor sentiments badly hit. But systematic investment plans (SIPs) of mutual funds still seem to be generating modest returns for retail investors who reposed their faith in the stock markets over the long term.

In the last five years or even over a three-year period, the Bombay Stock Exchange’s (BSE’s) benchmark index Sensex witnessed high volatility and saw the highs of 21,000 (in January 2008 and November 2010) and deep lows of 8,160 (in March 2009). But, the systematic investment style has held its own and retail individuals who continued with their monthly investments have got reasonable returns.

For example, if you had invested Rs 5,000 at the beginning of every month starting August 2006 till July 2011 in Sensex, then at a Sensex closing of 17,130 on Tuesday, your total investment of Rs 300,000 over the 5 year period would have grown to Rs 4,04,892 yielding an annualised return of around 12 per cent. Similarly, a Rs 5,000 monthly investment in Sensex over the last three years would have generated a return of around 10.25 per cent.

Against this, a lumpsum investment five years back in Sensex would have grown at a compounded annual growth rate (CAGR) of 9.8 per cent and that three years back would have grown at a CAGR of 5.3 per cent.

“Timing the market is tough and SIP takes away the human bias as investors rush to invest when the market is moving up and start pulling out when the market is down which is opposite of what they should be doing,” said Sundeep Sikka, CEO, Reliance Mutual Fund. “Every retail mutual fund investor should invest through SIPs and even the lumpsum investments should be broken down and invested in 4-5 parts.”

Having scaled the peak of 21,000 in January 2008, the markets are yet to reach the level, but SIP investors have seen good returns since it offers the advantage of rupee cost averaging when the chips are down.

During the same period, no fixed deposit generated a double digit return. Gold, however, has generated far superior returns compared with most investment products.

Gold prices have risen at a CAGR of over 28 per cent over the last three years and at a CAGR of 21 per cent over the last five years.

by: SANDEEP SINGH

Source: Financial Express