2 October 2015

“October Effect on Stock Markets” and Other Financial Nonsense

With arrival of October, there were bound to be some noise among investors and traders about the October Effect on stock markets. I am adding to the noise, with this data-driven post. :-)

October Effect Stock Markets

If you haven’t heard about this effect before, then here is a short primer borrowed from Investopedia:

October Effect is a theory that stocks tend to decline during the month of October. It is considered mainly to be a psychological expectation rather than an actual phenomenon. Most statistics go against the theory. Some investors may be nervous during October because the dates of some large historical market crashes (in US) occurred during this month.

In US, markets dropped 24% in two days in October 1929 – still the worst 2-day drop in American history. Then again in October 1987, the Dow dropped a record 22% in just one day. Come October 2008, and Dow was down over 22% in eight trading days.

Not surprisingly, there is a quote about this effect too – given by the famous Mark Twain:

“October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.”

It is because of these crashes in historically well-documented periods (like recessions and depressions), that people tend to cling on to these magnetic phrases like ‘October-Effect’, ‘Black-Monday’, etc. and become nervous when such months or days are around the corner. Humans also have this psychological tendency to pick up random events and generalize them. This also adds to the popularity of these terms.

But enough of foreign data. Lets see how October has fared for Indian markets.

Since 2000, the monthly returns of Sensex have been as follows:

Monthly Returns Sensex 2000

Now I can’t find any ‘October Effect’ here. On the contrary, I can see a March effect. ;-)

Lets go deeper into the past – upto Jan 1990:

Monthly Returns Sensex 1990

Here I can see something, which does seem like an effect of sorts – atleast when we look at the averages. But look at the 3rd column and you will realize that like October, even March has had similar number of negative-return months (16 out of 26). Even January and April have been close (with 13 out of 26). The impact of any such ‘October Effect’ vaporizes.

But now, lets think about it logically. When you group market returns according to months, it’s obvious that some months will come on top and others at bottom – that is how mathematics works. Isn’t it? Just trying to find a trend for the heck of it is a good academic exercise*.

But it is an altogether different matter to use this or any other trend, to make money in stock markets on a regular basis. 

Successful traders manage doing it on the basis of short-term trends. 

Successful investors manage doing it, on the basis of long-termtrends

As for the 'Rest' of the people… they are categorised as ‘rest of the...’ for a reason. ;-)

* - I love doing this.

In a smaller and ideal(er) world, something like ‘October Effect’ will be a reality. It is like a self-reinforcing idea. So if everyone thinks that it is true, then everyone will act accordingly. Eventually, everybody’s actions will lead to the result, which was expected at the first place (in this case: October Effect).

It is similar to the basic concept that is taught about inflation in theoretical economics class:

A key factor in determining inflation is people’s expectations of future inflation.

So if firms and consumers expect future inflation then it can become a self-fulfilling prophecy. If workers expect future inflation, they are more likely to bargain for higher wages to compensate for the increased cost of living. If workers can successfully bargain for higher wages, this will contribute towards inflation. 

Now apart from the term 'October Effect', there is another interesting market aphorism:

"Sell in May and go away.”

Its more popular in US than in India but even then, many people do give it some weightage. The idea, of course, is that stocks tend to underperform during the six-month period beginning in May and ending October. So if it were an ideal world and the above aphorism remained valid, then it will be pretty similar to the buy low and sell high philosophy. It suggests that investors sell of their portfolios at the start of May and come back and buy again in October-end.

Sounds interesting? Its like selling expensive stocks in May; Then going away on a 6 month long vacation and coming back to a market, which has fallen and has good stocks available at cheap prices. Wouldn’t that be lovely?

I wish it were true. :-)

Whether it is or not is something that we will try answering a little later.

I did some online searches and found that the phrase - 'Sell in May and go away' is based on an old stock market adage - "Sell in May and go away, come back on St. Leger's Day.”

According to online references, this proverb can be traced back to the old era in Great Britain, when traders closed their positions to enjoy the summer season and returned only after the St Leger's - supposedly, the last race of the season, held in September. This has lead many people to believe that the period between May and October is not good for investing!! Yes. It might sound hilarious, but there are people who did believe it.

And you will be surprised to know that there have been studies to prove it. A famous study published in the American Economic Review in 2002 found that, this phenomenon does exist and that returns on stock markets in 36 out of 37 countries studied from 1970 to 1998 were higher in the November to April period than they were in the May to October period. But then there was another study published in 2004, which attributed the higher return to a couple of extreme data points of October 1987 crash the August 1998 collapse of Long Term Capital Markets. These and few other studies found no exploitable opportunity in US markets based on the. However, what it did find was that coincidently, many major economic and political events seem to take place during May to October period – which result in extreme market movements.

So coming back to India, does the modified adage “Sell in May. Buy in October (November)” work here?

The average return of the broader market - Sensex - between May and October since 2000 has been 9.35% compared with 6.92% delivered between November and April during the same period. But then, there are other periods like July – December and August – January, which have given average returns upto 13%.

6 Month Returns Sensex 2000

Apart from that, the number of positive and negative returns periods are almost identical (10-11 for Positive and 5 for Negative).

Interestingly, the falls have been greater during the May-October period. As can be seen below, the list is dominated by May-October period and not by November-April period.

Indian Markets Biggest Monthly Falls

Now in another attempt to see whether Sell in May and Buy in November really does work in a practical scenario or not, lets consider 2 investors who wanted to invest Rs 10,000 in in stock markets in 1995.

Investor A is a typical buy-and-hold investor and does not believe in supposedly insane statements like Sell in May and Buy in November. He just invests Rs 10,000 in Sensex on 1st November 1995 and forgets about it.

Investor B is totally convinced about the May-November philosophy and holds his investments between November 1 and April 30. He then sells everything on May 1st and holds cash for the remaining 6 months before buying again on November 1st.

The figure below shows the results of the two investor's investments upto September 2015.

Buy Hold Investing Comparison

A buy-and-hold strategy of Investor A, would have turned an Rs 10,000 investment into Rs 74,975.

In comparison, Investor B who sold in May and bought back in November would have ended up with Rs 40,000. And this is when I have ignored costs, taxes related to transactions and also, the efforts involved in trading frequently. Add to this the fact that investor B would have also lost some amount of dividends, which would be available to Investor A for staying invested, we know what is the conclusion here. Simplicity works in your get-rich endeavors.

But one might argue that the bull market of 2003-2008 might have distorted the results in favor of buy and hold investor. But then, the crash of 2008-2009 was amongst the worst ever and gave sufficient variety to the data sampling. Then we also covered the dot-com crash of 2000s too. But nobody can prove or disprove buy and hold’s superiority over May-October Investing. What I did was only for a scenario, which started in 1995. Its possible that in another scenario, which might start in say 2002, the May-November logic might give better returns.

But what is clear from this particular scenario is that the buy-and-hold strategy is considerably simpler, doesn’t sacrifice dividends and significantly eliminates the transactional costs. But if you are asking me to pass a judgment in favor of either of these two approaches, then that’s not going to happen. And that is because, even though we have some data to prove that theories like ‘October Effect’ and ‘Selling in May and Buying in November’ are not worth much, there is no conclusive evidence that it holds true at all times.

For common investors, it’s best to stick with simpler things and ignoring complex and nice-sounding theories. In most cases, these might not work as a common investor does not have the time or resource to implement these strategies.

28 September 2015

What Would Happen If You took a loan of Rs 5 Lacs and Invested in Nifty?

Caution: Don’t do it without giving it a serious thought and knowing all the risks. For common investors, it is one of the riskiest things which they can do in stock markets.

Loan Invest Stock Markets

Common investors are better off avoiding mistakes than looking for multibaggers. Avoiding mistakes means not doing anything stupid with their money. It means having reasonable expectations and behaving reasonably. I will give you an example of each.

Example of Unreasonable Behavior

If a person has no idea about the actual business behind a share he has just purchased, then that is unreasonable behavior. The person is playing blind. He might still end up making money. But that is not because of his skill or any other ability, but because of his good luck.

Example of Unreasonable Behavior

Now markets can give returns in excess of 50% in a year. Compare this with returns of 8.5% given by traditional products and you would want to immediately dump your FDs, PFs, NSCs, etc. But expecting 50% to happen, year after year for decades, is a case of having unreasonable expectations. Such expectations, and actions based on those expectations are bound to cause serious losses in stock markets.

The problem with common investors is that they neither have the time nor the energy to sit and understand businesses behind the stocks they own. So ideally, the best way for them to avoid mistakes is to stick with investing in mutual funds.

But lets be honest.

Direct stock investing is glamorous.

And at times, it gives the perception that making money is easy – where else can you make 10% or more in a day. But this perception is just a perception and not the truth.

It is not easy to get above average returns in stock markets. I know most of you won’t believe me. But you need to take my word for it. It is easy to be average in markets. Just buy index (funds). But being better-than-average is difficult. And being better-than-average for long periods of time, is exponentially difficult.

Now lets come back to the topic…

The title of this post puts up a question, which can be linked to the behavior of someone who I personally think will be an Ultra Aggressive Investor. It can be looked at as one extreme end of a hypothetical risk spectrum depicted below:

Investor Personality

Think about it again. The title of this post asks you about what would happen if you took a loan and invested in something as risky as the stock markets. Sounds crazy. Isn’t it? And in most cases, it is crazy. In past, I have been regularly advising readers not to take loans to invest in stock markets.

But crazy might not be the right word to use here. It is actually all about the individual investor’s risk tolerance. To put it simply, it might be beyond the risk tolerance of a majority of people to invest in markets using borrowed money. Me included. But for many other, the risk may in fact be tolerable. I will come back to this discussion of risk in latter part of this post.

For now, I will tell you why this thought of doing a post on this topics came to my mind.

Few days back, I received a call from my credit card company, offering me a pre-approved personal loan of Rs 5 lacs at 10% for 5 years. I am sure many of you would be regularly getting similar unwanted calls. I politely refused the caller and told him that I didn’t need one. He tried convincing me but I managed to convince him against convincing me. :-)

But today, I thought about it. What if I took this easily available credit (ofcourse at a cost – though not very high) and put it to better use?

In real life, I believe that there is no better use of money than to spend it on buying experiences that my family and I will remember for the rest of our lives. But the second best use that I could think off was to deploy funds in stock markets. But that is risky and against my personal philosophy of not using borrowed funds to invest, that too in an asset class which can give sleepless nights to many of us.

I also remembered a reader Krish’s comment on my post last year, that it was surprising that whole financial fraternity advocates equity investing with savings but not using borrowed funds. People about debt/equity ratios of companies, loans for start-ups but discourage if someone wants to invest in markets with loan.

Now my stand is still the same. I don’t intend to borrow and invest for sometime to come. Atleast not in next few years unless something like a PE10 event happens. :-)

But the phone call from the credit card company and Krish’s comment had me thinking.

What - If ?

So instead of just thinking that investing using borrowed funds is wrong, I decided to see how this concept would have worked in past.

In rest of this post, what I will try to do is to use the past data to see what would have happened, if someone decided to invest Rs 5 Lacs in markets (after taking a loan). And to keep it simple, I will just stick with a scenario, where investment is made in the index. No direct stocks, futures or options. Just plain and simple index investments.

Sticking with the index is the easiest thing for a common investor. It might not be as profitable as active investing, but it still eliminates the risk of getting your stock picks or your fund picks wrong. By investing in index, one is not trying to beat the averages. One is trying to be the average. And that is not bad considering that averages in past have been in excess of 12% per year.

Now I am not sure what exactly was the interest rate or EMI, which the caller told me. But I used a simple loan amortization schedule to arrive at the required figures.

A loan of Rs 5 lacs at 10% for 5 years, can be serviced by an EMI of Rs 10,624.

This would mean that the borrower ends up paying Rs 6.37 lacs over a period of 5 years on this loan of Rs 5 lacs.

For the analysis, I got hold of Nifty data since 01-January-1999.

Now for each day, I assumed that an investment of Rs 5 lac is made in the Nifty. As already mentioned, this Rs 5 lac is funded by a loan for 5 years.

Then I calculated the returns on this investment after 5 years.

Now for analysis, ignoring other details like transaction costs, real value of money, mental stress, sleepless nights, etc., a return in excess of Rs 6.37 lacs for an investment of Rs 5 lac in index would mean that break-even point has been reached.

Anything above Rs 6.37 lac means that the entire transaction (Taking Loan –> Investing –> Repaying Loan –> Selling Investments) will be in green.

Again for simplicity, I am ignoring the debate whether it makes sense to take a loan just to break even after 5 years of risk-taking or not.

So here is the result set of more than 2900 data points:

15 Years Nifty Invesments

The blue line depicts the value of investments (of Rs 5 lacs) after 5 years.

The red line depicts the actual loan repayment amount which includes principal repayment as well as interest payments = Rs 6.37 lacs.

Now surprisingly, the blue graph hovers above the red line for most of the last 10-15 years! And at times, it even crosses Rs 30 lac! Yes… on an investment of just Rs 5 lac!

In fact, it’s below Rs 6.37 lac threshold for only 15% of the time.

Value of 5 Lacs 5 Years

Once again, this result points at the benefits of risky behaviour in stock markets. But it does nothing to show the risks involved. You might think that this behaviour is normal for stock markets. But that is not correct. India witnessed one of the greatest bull markets ever (in short term) between 2003 and 2007. The returns were so spectacular, that one cannot consider them to be normal. Its best to moderate the returns during the 2003-2007 Bull run to see a more realistic picture.

Now don’t draw any conclusions here. I am sure many of you would be having thoughts similar to the one below:

“That’s interesting. Even if I take a loan of say Rs 5 lacs, I only end up paying about Rs 10,000 a month as EMI. In return what I get is a chance to increase my investment from Rs 5 lacs to upto Rs 30 lacs!! Doesn’t that sound great? Also the chances of things going totally wrong are just 15%. Can’t I take this bet? Not much to loose here.”

Now I will tell you a real life fact here. If you take a loan, you would be using your available credit limit. And it’s also possible that you might not be able to avail any other personal loan till you clear off this existing loan. Now what will you do if you need that money for some emergency? You don’t want to sell your investments and exit at a price, which might be not acceptable to you. What if that emergency is such that you need to sell out irrespective of your losses. It’s not that easy. I hope you can realize the gravity of such a situation.

Now lets do one thing. Lets evaluate these returns, on the basis of P/E multiples of the Nifty. I have done some detailed analysis of PE in past. You can check it here.

In below graph, I am just breaking down the numbers obtained for Rs 5 lac investment on basis of Nifty P/E data.

Value of Nifty PE 5 Years

I am sure you would have observed a trend here. Lets focus on the first column:

PE 12 India Stocks

The very first thing to notice here is that a market below PE12 is extremely rare in Indian context. In the analysis, there were just 58 instances out of 2900+, where this actually happened. That is just about 2%. So if you want to time the markets and then take a loan, then please remember that it’s tough.

Also a real life fact is that when markets are available at levels where PE is close to or below 12, it would mean that economy is in doldrums. This would mean that credit would not be available easily. So you won’t get any cheap and easy loans to invest in PE12 markets. This is a very important point to remember.

But lets suppose that you do find money to invest. Now the chances of turning profitable (investment value more than Rs 6.37 lac) are much higher at lower PEs than they would be in say during high PE zones of 20+ (below):

PE 20+ India Stocks

As you can see above, most of the instances in encircled box are towards the top, i.e. lower returns on investment of Rs 5 lacs (which eventually costs Rs 6.37 lacs).

So if you find that PEs have gone down to horribly low levels (CRISIS) and if you can tolerate the risk (COURAGE). and can borrow quickly from any family source at say 0% (CASH), then that will be great. Congratulations of combining the 3 Cs. That is the formula of getting rich in stock markets.

Now I have told you that personally, I don’t intend to take such a risk. But I know people who have done this successfully. A good friend of mine is one of the most aggressive investors I have ever known. He did what I can never do. He borrowed about Rs 25 lacs from various sources like banks, family, and friends and invested in around 10 stocks in 2013. Now his portfolio value exceeds Rs 50 lacs and he is still paying regular EMIs. I am trying to convince him to prepay atleast a part of the big loan with his profits. But he is a perennial optimist. I just hope it works for him in the long run. :-)

Let me now add a few concluding words about the risk-discussion I parked in the first half of the post.

Is it a good idea to borrow money to invest in stock markets, which are inherently risky?

Honestly speaking, there is no definitive answer to this question. I am biased by my own behaviour to say that it’s wrong to do. But data (above) shows that there may be some merit in it if the cost of borrowing the funds is not much.

Like all other investment choices, this choice is also linked primarily to an investor’s investment risk tolerance and has multiple dimensions of risk: the risk of taking loans and the risk of investing in the stock market.

The biggest risk with loans is that it’s a promise to pay back in future, which is based on the assumption that you will continue to earn enough to regularly service the EMIs. But future might bring in some unfortunate incidents that your ability to repay loans may be compromised. This makes loans risky.

Then there is the general risk associated with stock markets. Data analysis I did is fine. But past performance is never a guarantee of future returns. :-)

Now when we combine these two risks, things can get really complex and unthinkable.

Just a situation for you to ponder about. You take a loan to invest. You end up investing when markets were not cheap. Markets crash. Your investments are down 30%. Economy itself turns bad. You are fired from your job. But you still need to pay EMIs and run your house. You end up selling your investments at a loss. Your entire data driven plan goes out of the window.

But on the upside, things can be beautiful – as shown in a data point to where an investment of Rs 5 lacs turned into something above Rs 30 lacs in just 5 years!

To put it very simply, the idea of borrowing to invest itself is not bad. It is just a very risky one. More so if you are a common investor under common circumstances.

21 September 2015

Had the 2003-2007 Bull Market & 2008-2009 Bear Market not been so Severe?

Dear Readers, I am playing God in this post. :-)

Everyone keeps talking about the severity of Indian bull market of 2003-2007 and the bear market of 2008-2009.

Now almost nobody actually expects Indian markets to rise like it did between 2003 and 2007. I read an interview online, where a market commentator said that “2003-07 was really a macro-bull market where… you had four years of 40% compounded earnings growth without inflation and interest rates falling.” That is almost (un)repeatable. Also, nobody expects our markets to fall like it did between 2008 and 2009.

2003 2007 Bull Market 2008 2009 Bear Market

Interestingly, most people feel that these two phases were once in a lifetime opportunities for investors. And I personally don’t doubt it. Its rare to have a bull market that rose almost 40% a year for more than 4 years. And its equally tough to have a bear market which falls by more than 50% in just about 15 months.

Now I am not trying to predict whether similar bull or bear market moves will ever happen again or not. What I am trying to do is to answer this simple question:

What would have happened if the Bull and Bear markets between 2003 and 2009, were not as ferocious / severe / eye-popping as they actually were?

Now there might be complex statistical approaches to provide a solution to the above question. But I am not a world-class statistician. And honestly, I did a Google search to find whether similar analysis were done in past or not. And as expected, nobody wasted his or her time on this ;-)

But I decided to answer my own question. And for that, I did the following:

  • Took Sensex data starting from January 2000.
  • Assumed (approximated) the Bull market started on 1st January 2003.
  • Assumed the Bull market ended on 31st December 2007.
  • Assumed the Bear market started on 1st January 2008.
  • Assumed the Bear market ended on 9th March 2009.
  • During the bull market from 2003 to 2007, I relaxed the index movements by 10%. i.e. if index moved by 100 points, only 90 points were considered.
  • So if Sensex was at 1000 on 1st Jan 2003, and it moved +10 points on 2nd Jan to close at 1010, then at the 10% relaxed level, Sensex would have instead closed at 1009 (= 1000 + 90% of 10 points).
  • From there on, a new alternate Sensex would come into existence and which will only consider 90% of the actual movement for index level calculations.
  • Same thing was repeated during the bear market of 2008-2009.

So effectively, what I did was to reduce the impact of Bull and Bear markets by 10%. Resultantly, all daily movements between 1
st Jan 2003 and 9th March 2009 were 10% less severe.

Then this entire exercise was repeated using 20% relaxation!

Here is the result of this exercise:

Indian Bull And Bear Markets

As you can see above, the graphs for both 10% and 20% Relaxed-Sensex levels look strikingly similar to the graph of actual Sensex. But that is not strange considering that I have just reduced the intensity of daily movements by 10% in one case (Red) and 20% in other (Green). I have not made any other modifications.

Now comes the interesting part.

10% Less severe Bull and Bear market

The Sensex was at 3377 on 31st December 2002. Now when the bull market ended on 31st December 2007 (assumption), the index had reached a high of 20,287. If we relax the index movements by 10% (as described above), it would have reached 17,155.

2003 2007 Bull Market India

Lets see what happened in the bear market of 2008-2009:

Now index crashed from 20,287 to 8160 in just a matter of 15 months. Had the fall not been so severe (and also assuming the rise had been less severe between 2003 and 2007), the index would have gone down to 7,637. It is lower than actual level, but in percentage terms, the fall is less severe considering the peak was 17,155 (and not 20,287).

Lets move on and see what happens when index movements were further relaxed by say, 20%.

20% Less severe Bull and Bear market

Sensex in this case would only have risen upto 14,469 in 2007 and fallen to a low of 7112 by March 2009.
2003 2007 Bull Market India 20%  2008 2009 Bear Market India 20%

When the Bull + Bear markets (2003 – 2009) are looked at in totality (without, as well as with 10% and 20% relaxations), following results are obtained:

Actual Project Sensex India

As you can see, even after reducing the daily movements by 20%, index still managed to do a pretty good job between 2003 and 2009. And that is inspite of having witnessed one of the worst bear markets ever. This points at the (almost) unbelievable rise of Indian markets between 2003 and 2007.

Now I am not trying to come up with any insights here. This post is all about exploring a ‘WHAT-IF’ scenario. A scenario where the bull and the bear markets, were not as severe as they actually were.

Why I did this?

5-word answer will be sufficient here:

Just Out Of My Curiosity. :-)

Caution: No part of this post should be considered as an analysis on which, you should base your future investment decisions. My curiosity can result in your losses. And you (or I) don’t want it. ;-)

Note - For those who are interested in knowing about the Sensex levels, had the so-called Sensex relaxation approach followed till recent times, the Sensex would have been at 24,596 and 22,905 at 10% and 20% relaxation levels on 31st August 2015. Actual Sensex was at 26,283. But please note that relaxation was only applicable between 2003 and 2009. After that normal daily index movement (in %) was applied to arrive at these fictitious Sensex levels.

14 September 2015

Building Wealth through Systematic Investing in Mutual Funds – A Case Study

Note - This is a guest post by Ajay - a regular reader of Stable Investor. He has written many useful posts on Stable Investor about accumulating funds for recurring expenses, investing surplus money in mutual funds, his own experience of accumulating Rs 3.7 crores in 10 years. Alongwith with him, I also did a detailed comparative analysis about Real Estate Investments vs. Mutual Fund Investments.

So over to Ajay - who is once again highlighting the importance of systematic investing in creating wealth.

Wealth SIP Equity Funds

For years, mutual fund companies have been trying hard to convince retail investors about the benefits of SIP. Investment advisors, newspapers, personal finance magazines and even blogs have been doing it for years.

But sadly, despite the Indian mutual fund industry being 22+ years old, only a small section of the retail investor community has benefited in the real sense, from investing in mutual funds.

And this is not a general observation. It’s a fact and has also been highlighted by a well-respected fund manager from Franklin Templeton, based on the analysis of their mutual fund folios after completion of 20 years of Franklin Blue Chip Fund. According to their study, despite the fund delivering consistently high and market-beating returns, there are hardly any investors who have profited fully from this fund.

The reason for this can be attributed to the fact that most of the times, retail investors are sold products that don’t meet their requirements. The distributors and agents are only selling products, which give them the highest commissions. And this does not stop at that. These agents and distributors then convince investors, to churn their portfolios continuously to extract more commissions from them!

Now there is nothing new or radical that is being said in this post. And you might have already read similar articles about SIPs on other blogs and personal finance magazines. This post is a reiteration of our strong faith on the power of regular investments through Systematic Investing Plan (SIP). We will use fact and figures to further substantiate this faith.

So let us get into the details now:

For this multi-scenario case study, we have chosen the mutual fund scheme: Franklin India Prima Plus Fund – Growth.

An amount of Rs 10,000 was invested monthly (via SIP) in this fund starting from July 2000 (for a 15-Year Period for this case study).

Now we did not attempt to time the markets or try any other complex techniques. We just focused on doing a plain and simple, monthly SIP of Rs 10,000 for a period of 15 years.

If you want, you can see the entire investment statement by clicking on the small image below:

Franklin India Fund SIP

To summarize, a regular monthly investment of Rs. 10,000/- from July 2000 to June 2015 (with 1st trading day of the month taken as the SIP day) was done. This amounted to an actual investment of Rs 18 lacs.

Now in June 2015, which is after 15 years of starting the SIP, the invested amount of Rs 18 lacs has grown into a corpus of Rs 1.28 crores! Not a small amount considering that just Rs 10,000 was invested every month. And to put it on record, we did nothing spectacular. We just did SIP. That’s it.

Rs 10,000 x 180 Months = Rs 1,28,00,000 (!)

Looks crazy? But that is the power of long term investing.

As a retail investor, you don’t need to be super intelligent or a financial wizard to create a big corpus. As Buffett famously said,

“Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.”

For retail investors, the rule of the game of wealth is simple:

Don’t do anything else apart from investing small amount (as much as you can manage) every month for long periods.

In our case study, it’s about investing an amount of Rs 10,000 every month for a period of 15 Years. Not a very difficult thing to do for quite a few of us. Isn’t it?

So if its so easy to create wealth through a simple SIP, then why do people continuously talk about equities being risky and complain about losing money by investing in stocks and equity mutual funds?

Are the equity mutual funds really that risky? The answer is a big ‘No’. It is not risky provided you play by the rules of the game. And to convince the skeptics, lets analyze the returns earned by the chosen mutual fund during different periods.

Since the investment is SIP-based, we calculated the XIRR returns over different period. In our opinion, 7 years and above is a suitable time frame for investing in equity mutual funds.

However we will calculate XIRR (or internal rate of return) for 3 years, 5 Years, 7 years, 10 years and 15 years.

Rolling 3-Year Returns

Please note that 3 years is not a suitable time period for investing in equity funds.

An amount of Rs 10,000 was invested via SIP on 1st of every month for 3 years. So in 15 years, we get 13 data points on a rolling 3-year basis. The XIRR results are as follows:

Franklin India Prima 3 Year SIP

Out of the 13 available data points, not even once were the returns negative. The returns ranged from lows of 4.28% to highs of 48.45%.

9 of the 13 three-year periods gave returns in excess of 18% - which is not a small achievement.

4 of the 13 three-year periods gave single digit returns ranging from 4.28% to 8.32%. No doubt, these figures are low. But there still hasn’t been a loss. Now lets agree to one fact. In short time periods, bull and bear markets can significantly distort the returns. Both on the higher, as well as on the lower sides.

So lets carry out similar analysis for longer time-frames.

Rolling 5-Year Returns

Now 5 years is the bare minimum, which one should consider for investing in equity funds.

In this particular scenario, an investment of Rs 10,000 was made via SIP on 1st of each month in each of the 5-year periods. In a 15-year period, we get 10 data points on a rolling 5-year basis. The results are as follows:

Franklin India Prima 5 Year SIP

Once again, not even once did the returns turn negative. i.e. there were no loses. In fact, the returns ranged from lows of 8.71% to highs of 49.43%. It is worth noting that the minimum returns are quite close to risk-free (and most of the times taxable) returns provided by PPFs and bank fixed deposits.

7 out of the 10 five-year periods gave returns in excess of 17%. There was just one single digit return period of 8.71%.

Let’s now move further.

Rolling 7-Year Returns

For a 7-year SIP, the return figures are as follows:

Franklin India Prima 7 Year SIP

The most important thing to observe here is that once again, there are no negative returns periods. And the returns range from lows of 9.54% to highs of 42.52%.

7 out of the 9 available periods gave returns in excess of 16%. The two lowest returns were 9.54% and 11.04%. And both these are well above the returns given by traditional bank deposits, PPFs, NSCs, etc.

Now lets move to 10-year period now.

Rolling 10-Year Returns

In this, we only get 6 rolling periods of 10 years each. The returns corresponding to each of these periods is given below:

Franklin India Prima 10 Year SIP

No losses. Lowest is 17.40%. Highest is 28.18%.

And all the six period have provided returns in excess of 15%.

It is worth understanding that these type of returns are the best among all available financial instruments like fixed deposits, PPFs, NSC, etc. And unless you were lucky in real estate, you could not have made such returns in any other asset class.

Now the interesting thing about these 10-year periods is that these started with a bear market in 2002 – 2003, which was then followed by mega bull-run of 2003-2007. Then came the crash of 2008-2009, which was then followed by the sideways move of 2009-2014. Since 2014, it’s been a practical bull market till June 2015. So most of the data points in 10-year periods have gone through couple of bull and bear markets. Yet the returns have been positive and in fact, exceeded 15% in each of the period.

Rolling 15-Year Returns

In a 15 year period, we just have one data point. And returns for this period of 2000-2015 are 23.25%.

Franklin India Prima 15 Year SIP

It can be safely said that over a 15-year period, none of the investments (excluding real estate in some specific areas) would have provided such returns. More importantly, such returns have been achieved by small monthly investments without straining your pocket or cash flows.

Now we know what you must be thinking.

Why was this particular fund chosen?

Or what would have happened had we taken any other fund?

Now as per Value Research, the scheme Franklin India Prima Plus Fund is rated highly - as a 5 Star Fund. It ranks in top 3 in the Large & Midcap Equity Funds category over a 5-year period. It is also among the top 3 funds over a 10 Year Period. To sum it up, it’s one of the best performing funds in its category over short, medium and long term.

So lets admit that we intentionally chose the best and the top rated fund in the Large & Mid Cap Category for the above study. Hence, all results were bound to be in our favor. Isn’t it?

No worries. Lets change the fund now. :-)

What if we choose a fund that is one of the worst performing funds of its category?

That will be an interesting analysis.

So we take one of the worst performing funds - Sundaram Growth Fund, and repeat our analysis.

As of June 2015, Sundaram Growth Fund has been rated as a 1 Star Fund, and ranked in bottom three of the Large & Midcap category over a 5-year period. It is also ranked last in all funds over a 10-year period.

So once again, lets analyse the power of SIP using the worst performing fund.

If you want, you can see the entire investment statement by clicking on the small image below:

Sundaram Growth Fund SIP

To summarize, a regular monthly investment of Rs. 10,000/- from July 2000 to June 2015 was done. This amounted to an actual investment of Rs 18 lacs.

Now in June 2015, which is after 15 years of starting the SIP, the invested amount of Rs 18 lacs had grown into a corpus of Rs 68.42 lacs!

So this has been achieved by a simple SIP in 15 years, when invested in one of the worst performing funds.

Comparatively, the best fund created a final corpus of Rs 1.28 crores. The total investment was same in both the funds, i.e. Rs 18 lacs.

This divergence in returns highlights the importance of choosing the right fund and monitoring the same regularly for its performance.

Now lets proceed to our XIRR analysis for various time-periods.

Rolling 3-Year Returns

Below is the table giving the rolling 3 year returns in our chosen fund:

Sundaram Growth Fund 3 Year SIP

So while the best fund delivers returns between 4.28% and 48.45%, the not-so-great fund delivers returns between -0.44% to 47.10%.

Although, the best fund had no negative returns in any of the 3 year investment periods, this fund gives negative returns in 2 of the 13 data points.

Rolling 5-Year Returns

Sundaram Growth Fund 5 Year SIP

Out of the 10 data points, not even once the returns were negative. And we are talking about one of the worst funds here. :-)

Lets move on to longer periods now.

Rolling 7-Year Returns

Sundaram Growth Fund 7 Year SIP

The returns in 7-year period range from lows of 4.08% to highs of 37.72%. Compare this with the range of returns (9.54% to 42.52%) produced by the best performing fund.

7 out of the 9 data points for the best performing funds gave returns in excess of 16%. For worst performing fund, only 4 out of the 9 data points provided returns in excess of 16%.

Now 2 out of 9 data points gave returns of 5.52 % and 4.08%. Though theoretically, it’s not a loss, it is still lower than what could have been earned through safer options like FDs, etc. In case of best performing fund, it did beat the fixed deposit returns even at its worst. So once again, it proves that fund selection is very important.

Rolling 10-Year Returns

Sundaram Growth Fund 10 Year SIP

No losses. Low of 9.21%. High of 24.03%.

Compare this with the returns given by the best fund - which had a low of 17.40% and a high of 28.18%. The best performing fund managed to give returns in excess of 15% in all 6 ten-year periods. The worst performing fund could manage it only twice.

Now comes the most important part.

Even though the returns of the worst performing funds were (obviously) lower than the best performing fund, the it were still higher than those given by other instrument like fixed deposit, NSCs, PPFs, etc.

Read the previous paragraph again to understand its importance.

Rolling 15-Year Returns

The story is similar for the 15-year period too. The chosen fund delivers return of 16.09%, which is way below 23.25% achieved by the best performing fund.

Sundaram Growth Fund 15 Year SIP

But even though the worst fund does poorly when compared to best one, it is still not a bad performance, when compared to other safer options.


The above analysis shows that for the best fund in its category, there were no losses in any of the 3, 5, 7, 10 or 15-year periods. Even the worst performing fund managed to avoid losses in 5, 7, 10 and 15-year periods. Though there were minor losses in few of the 3-year periods.

But we need to remember that anything less than 5 years is not suitable for equity fund investing.

Now a very important point to understand here is that even though the difference in returns of two funds might not look large (23.5% - 16.09% = 7%), over a 15 year period, it can have significant impact on the final corpus as shown in table below:

Best Worst SIP Fund India

Note about Sundaram Growth Fund:

Between 2000 and 2005, this fund was an average performing fund and not counted among the good ones. Since 2006, this fund has not performed well and currently stands at the bottom of the large and midcap category.

Lets now try to answer some questions (which readers might have) about SIP investing:

Frequently Asked Questions

Why do most investors end up losing money or not getting decent returns from SIPs?

They do not follow the main rule of the game, i.e. keep investing an amount X every month for a period of 10 or more years.

They try to time their entries and exits in markets instead of focusing on staying invested.

Once again, have a look at the complete investment tables for the 2 funds used in this analysis. Except for the initial years (up to 2 years), there was no time when the folio had come into a loss. Even during the 2008-2009 crisis, if one had been a regular investor, the high returns might have been lost, but the value of folio would still have been very decent in comparison to the money invested.

What if I had entered the markets during the peak of 2008? I would have lost my money. Isn’t it?

On 1st January 2008, the NAV of Franklin India Prima Plus Fund was Rs 212. After the crash, the NAV was down to nearly Rs 98 by March 2009 (a fall of more than 50%). But it returned to Rs 220 by September 2010. So even though your folio was down in 2009, it must have been back to its original level by 2010. In addition, your regular SIP during 2009 would have allowed you to purchase units at cheaper NAVs, which would have given phenomenal returns by the end of 2010. Hence at a portfolio level, you would have done well.

You can check the rolling 3-year returns table in the post above (for Franklin India Prima Plus Fund). The returns are almost 19% to 21% for the periods between 2007-2010 and 2008-2011. So there would have been no loss even if you had entered at the 2008-peak and kept on investing as a regular dumb systematic investor.

I did not get the high returns from markets that people regularly talk about.

The market may or may not give high returns in the short term (spanning 1, 2 or 3 years). But there is data to prove that if one stays invested for periods of 5, 7 or 10 years in good mutual funds, returns easily beat those of traditional options like bank FDs.

What is that you want to say?

Equity mutual funds are the best available investment options to build wealth.

SIP is the best way to invest in equity mutual funds.

You don’t have to be a financial genius to build wealth.

You have to play as per the rule of the game i.e. keep investing an amount X every month for more than 10 years.

The markets will crash sharply, stay low, rise slowly, and run up fast. This is natural. But you can ride over it and make money only if you play according to the rule of the game.

Disclosure: I am an individual investor sharing my personal experience. I have no interest in buying or selling any of the funds mentioned in the above analysis or otherwise. As an investor, readers need to do their own analysis or take help from investment advisors before making any investments. I am also a SIP and lumpsum investor in Franklin India Prima Plus Fund since 2006. I am not an investor in Sundaram Growth Fund.
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