SIPs do not guarantee returns

FE study reveals that on 8 of occasions the investments have dipped below cost.

Its often that a broker or a fund manager advises that the best way to invest in equities is to go the systematic investment way,i.e. by investing in SIP Systematic Investment Plan. This investment involves parking money in equity markets on a monthly basis so that you average out the holdings costs.

Distributors quote 3-5 years as a sufficient period to be assured of handsome returns. However,the real world of equities is something else. Over the longer term,equities generally assure better returns than debt products. However,a study conducted by FE shows 3-5 years may not be enough to even recover back your capital.

While the concept of SIP has to do with rupee-cost averaging and has to do with beating market volatilities,often it has been found that equity markets sometimes remain sideways for way too long to give any reasonable returns to investors. That too for ten years or so.

The FE study of SIP returns on Sensex,a benchmark for equity returns,finds that if you are entering a three-year SIP and then selling all your portfolio after the three years,on an average you lose money on your investment 17 of the times.

In case you stretch the investment horizon a bit longer to five years,then it is 13.5 of the times that you end up having a portfolio value which is lesser than your investment cost.

What perhaps might shock investment advisors more is that even if you were to invest with an investment horizon of ten years,on 8 of the occasions you actually fail to even break even. This study perhaps removes the myth that most portfolio managers believe which is that a 10-year horizon is long enough to make money.

Perhaps the definition of long haul needs to be redefined to 15 years for it is only in 15 years that SIP investment ends up getting a portfolio value on maturity which is more than the total cost at all times. For the purpose of the study,we had taken 3,5,10,15 years rolling returns on various SIP investment.

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This trend shouldnt come as a shocker considering that Sensex doesnt moves in a straight line on the way up.

It reacts/overacts to news and even if everything is going well,poor investment sentiment keeps a check on its movements. This is perhaps the reason that during the period July 2001-May 2003,if anybody had gone for a ten-year SIP,he would have not made money most of the times.

Interestingly,equity markets have also remained sideways on a point-to-point basis since April 1994-2003.

For shorter horizons of three years or so,such possibilities of not even breaking even is much more.

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So,the lesson that an investor needs to learn is that investment horizon has to be much longer that is at least 15 years and not 3,5,or 10 years.