The Mutual Fund Show: How To Maximise Returns From SIPs
Extending the holding period of the SIP is the key to getting optimal returns.
Systematic investment plans, or SIPs, have grown in popularity and are seeing rising retail participation. However, investors can find it difficult to stick to their SIPs, and thus, may end up missing out optimal returns.
"Only if your tenure is at least three years, you will make some money against your investment," said Juzer Gabajiwala, director of Ventura Securities Ltd.
According to a data point shared by the Association of Mutual Funds in India, among those who continue their SIPs for more than five years, nearly 89% stop it at some point. So, you have a continuation or ratio level of 11%, Gabajiwala said.
Referring to a recent study on SIP trends by Ventura Securities, he highlighted that returns on SIP for one or two years was generally sub-optimal.
"But the moment the tenure was extended to three years, the return really went into double digits," he said.
Investors starting an SIP during volatile years—like 2008 or 201—would see their returns turn negative because of the steep decline in markets. But the returns would turn positive if the SIP is continued for the next year, the study showed.
"We have not seen the markets being negative for more than two years at a stretch, whether in a calendar year or in a financial year. And, when you have one or two large negatives, the bounceback is equally high. So, by just extending your holding period, your entire experience can undergo a change," said Gabajiwala.
Watch the full video here:
Edited Excerpts From The Interview:
What prompted you to do this study?
Juzer Gabajiwala: I am sure everyone will be seeing more of data which is being released by AMPI recently that how many SIPs are continuing and we are also seeing that lot of SIP amount is coming into the system. But one of the very interesting data points which AMPI shared was that people who are continuing their SIPs for more than five years. Nearly 89% of them at least stopped it.
So you have a continuation or ratio level of 11%. So, what typically it states is that there's any investor starting this journey, only 11% of investors are completing it for a period of more than five years. And the data is also most surprising that even in less than one year, nearly 62% of investors stop their SIPs in one year.
That actually prompted us to see why it is so. Investors are actually committing for the long term, but are actually investing only for short term. We tried to look at some data points in terms of that, why this behaviour is happening. So that's why we took that for a period of 10 years. Ten years is a fairly long period of time. We have seen lot of ups and downs in the markets... We also just took three broad categories that are large, mid and small caps, and multi cap is a mixture of all of them. Flexi cap is also a mixture of all of them.
So, what we observed is that if anybody is doing an SIP for one year or two years, their return generally is very, very sub-optimal... But the moment the tenure was extended to three years, the return really went into double digit. So, it's like saying that if you do an SIP for one year, or two years, you are definitely not going to see any traction of returns in your investment. So, only if your tenure will be minimum three years that you will make some money in terms of your investment. This is the biggest findings which we could find in our study.
So, let's bring this table to the screen and then try and understand what is it that Juzer is trying to say. Juzer, please explain the table mentions large cap 24 schemes, midcap 18 and small cap 10. Now these have been randomly chosen, or are these schemes that have passed some filters?
Juzer Gabajiwala: Basically, schemes which were more than 10 years old is what becomes our database because that would require consistency. There were 24 schemes in the large cap and 18 in the mid cap and 10 in the small cap. These are the number of schemes which are available at that point in time. We have been agnostic in terms of what the data is, so we are not trying to be selective over here.
So, the filter is that the scheme should have been in existence for 10 years, because they're mapping decadal returns as well and Juzer, then you're saying that if for example in the mid cap space, the mid cap schemes, which are 18 schemes, if people held the SIP for one year, the average return was -3% or -2.9. If it was for two years, it's 2.2. But the moment you shift to three years and above, the minimum return was 11.4 and it went up to 13.3%. So any scheme which was started 10 years ago, let's say 2013 or 14, as the case may have been, if you're in it for just more than two years, then you clocked in double digit returns in the mid cap space, actually, even in the small cap space. It's the same thing.
Juzer Gabajiwala: Absolutely. In fact, in small cap, if you hold for two years, it became 5.5. As a return was higher than a large cap and mid cap.
So, are there any reasons aside of the basic nature of compounding? I mean, is it something that could have happened in the decades before as well? Any thoughts on this?
Juzer Gabajiwala: So the thing is that one of the reasons of selecting this time horizon is that we got some 2013-14 and what we got, and then we also dug a bit more deeper. And when we went even 20 years, we saw steep drops on the basis of calendar year, two calendar years where we have got negative returns, 2008 and 2011. In 2015, it was marginal.
So, we also took a data point that somebody had started let us say an SIP in 2008, then was the peak of the market, but his return would have been quite negative at the end of the year because the markets had tanked. I am sure you remember 2008. We had the lowest prices between the crisis and everything was there. But the moment if the person had continued his SIP during 2009, the entire scenario changed in two years itself. So, just as you know, by extending your holding period the whole, what you have an experience undergoes the change.
And one of the biggest reasons which we have seen what a lot of investors do not realise is I will say that I am doing an SIP for 10 years, okay, but for all practical purposes, your average holding period is only five years because your one installment has gone as late as yesterday, and one had gone 10 years back. So, I have started for 10 years and doing something for 10 years, and I'm not making great returns. But not realising that it is only your average investment holding period is only five years.
So, when you are somebody looking at an exposure of one year, his actual holding period of the investment is only six months. How you can make money in six months’ time? It is not possible and that also expecting the entire basket to perform. So, unless and until then, you have a scenario like we had in 2021 when the small cap and mid cap index were really up and there was boom in the market, so suddenly people have seen a fantastic return and then you saw this year when the returns had been you know absolutely suboptimal. So, you are expecting that the same thing will get repeated year on year is just not going to happen in the equity market.
Does the examples of calendar year 2008-9 and 2011-12 suggest that if viewers have gone through a period of turmoil in a particular calendar year, it probably becomes even more imperative to continue with SIP because the chances of you returning to black in a major way might be around the corner? You will see this happening in both the categories in both the calendar years.
Juzer Gabajiwala: Absolutely. In fact, if you see the pattern of Nifty mid cap as well as small cap... we have not seen the markets been negative for more than two years at a stretch, whether in a calendar year or in a financial year. And when you have one or two large negatives, the bounce back is also equally high. So, by just extending your holding period, your entire experience can undergo a change. In fact, my advice to investors is that if you are not committed to a minimum of three years of SIP, you should not even bother to start an SIP. Don't even start an SIP for one year and then just stop it. Don't do it. Don't start it.
A lot of people are talking about doing SIPs in the small cap area because the broader end of the spectrum might perform really well. I am wondering if there is a select basket of names that you might be able to recommend. If you are able to recommend some of those with the perspective that people should start this SIP for a minimum period of three years, ideally even longer.
Juzer Gabajiwala: See ideally, small cap is one place where you can actually make good alpha... The fund manager can have some so-called meeting because he has got a basket of 250 plus stocks, which again you can play around with and, typically, those are the spaces where volatility is also going to be very high.
So, my sense is that you need to at least have a five-year holding period in a small cap fund even though data is showing some. Otherwise that you do turn around and make money in three years, but mentally you should always be prepared for a five-year time horizon.
If you are making money in three years, there's going to be no harm, but if you don’t make, then you know that your expectations is not being met. So, it is better for a five-year minimum SIP period. Even then, your holding period is two and a half years.
And frankly, if you ask me in terms of schemes per se, we would generally not going to recommend, but the front line ones are doing very well. Look at a reasonably sized corpus. Don’t look for a very large corpus or don’t look for a very small corpus and ensure that there is a consistency of a fund manager. That's another criteria you look at and at least minimum three years in existence so that of how the fund has been performing and you'll automatically get your numbers over that. So, they're not many comments you will be able to choose then.