SIPs are Better Even in These Testing Times

For equity investors, the period from the beginning of 2008 onwards was not that great. With Sensex almost at the same level at 20,000 the 6 year period was a no return period for the investors.

Are markets back at 20,000 Sensex levels of January 2008? The answer is both YES and NO.

Had you invested in the shares of TCS, ITC, Tata Motors, HUL, M & M and Infosys the returns during these 6 year period would have been spectacular. The top 10 performers of Sensex are up by 145 % during these 6 year period.

Then why Sensex is still at 20,000? Who are the laggards?

The stocks of BHEL, Tata Steel, RIL, NTPC, Hidalco, and Bharti are down by 65% to 32% during the 6 year period and pulled the Sensex down.  The bottom 10 companies are down almost 54% since January 2008. All these are established companies with excellent track record. Still they are underperformed for a long period from 2008.

Huge debt burden, high interest rate, acquisition of mega companies and the resultant cash flow issues, policy paralysis etc. can be attributed to this underperformance.

Then, how to identify winner stocks and invest?

Identifying winner stocks is bit difficult even for a seasoned investor. Then how to participate in the equity market?

Mutual funds are better and SIPs are still better.

Let us see how mutual funds have performed in the period from 2008 to 2013. Given below are the SIP returns of 10 select funds. SIPs are assumed to be for the period 1^st Feb. 2008 to 1^st Jan. 2014 (72 months or 6 years). Let us see how monthly investments of 1000 have grown in this period. Market value of investments as on 26^th Feb. 2014 is taken from Value Research.

The first 5 funds in the chart below are diversified equity funds, 6^th fund is a balanced fund, 7^th and 8^th are mid cap funds, and the last 2 are Sector funds.

From the above chart, it is clear that the 5 equity funds have given an average return of 11.6% during this 6 year period.  The Balanced fund has given a return of 11.85%. The mid cap funds have given an average return of 16.72%. The sector funds have given an average of 17.9 %.

These were real testing time for the markets – still SIPs have delivered

These 6 years were highly volatile and it was difficult to invest. Even in such times, the SIP investors got double digit returns. It is not a bad idea to be happy with 11.6% return in a market which has not moved at all. Volatile markets are good for SIP investors.

Equity investment is for long term. In this long term, there will be some years of low performance like this. But there can be some years of super performance also. In the long term, it will average out and can offer you better return for the full term of investment.

If your goals are at least 10 years away, it makes sense to accumulate the amount through equity mutual funds. You can select 2-3 large cap funds, 1-2 mid cap funds and 1-2 sector funds to invest. If you go through the direct plan option without agents, it will offer still better returns.

For shorter durations, you can go for balanced funds or debt funds. There are liquid funds, which can offer you better returns and can be used almost like a savings bank account.

Right fund selection, periodic review of fund performance, long term view are the key factors in mutual fund investing. Even your savings in fixed deposits can be invested in debt funds to get better tax adjusted returns. For investors in the higher tax bracket, this will offer excellent savings in income tax. Mutual funds are tax efficient saving options.