SIPs mainly operate on the cost-averaging principle. That is, with the forced monthly instalments, investments will be made regardless of market movement. If markets are trending down, your cost of investment is gradually averaged lower. When the market eventually picks up, the gains are higher with the lower cost.
In the past two decades, barring the bull market of 2003 to 2008, an uptrend or downtrend has lasted around two to three years. A SIP, therefore, has to necessarily be operated for at least four to five years for the investment to deliver.
For instance, if a SIP had been started in September 2009 in Franklin India Bluechip and continued for five years, it would now yield returns of 15 per cent. If a lumpsum had been invested in 2009, annual returns would have been 12 per cent.
Consider an investment started in the heady days of 2007 and sold when the markets were falling. Say, the SIP in Franklin Bluechip had been started in January 2007 and continued till the end of the downtrend in 2011. SIP returns would have been 13.8 per cent compared with the 7 per cent in case of a lumpsum investment in 2007.
Short-term hiccups should not prompt quick action. The set of funds that top the returns charts in one cycle often differ from those that are the leaders in another, even within the same fund category. Pulling in and out of a fund based on performance in a single market cycle may, therefore, backfire if the fund does get its act together and pulls ahead.
Take the old war horse HDFC Top 200, for example.
The fund’s performance slumped for most of 2013, having seen the potential in banking and auto stocks much too early. But performance picked up this year. A monthly SIP in the fund from September 2009 to August 2014 would have given a 19.1 per cent return, compared with the 14 per cent in the case of a lumpsum investment five years ago.
Of course, the added benefit of a SIP is that savings are disciplined, convenient, and don’t depend on your reading of the market. Getting mileage out of lumpsum investments requires timing both your entry and exit correctly, which is hard to do and also needs considerable time spent to stay abreast of market movements.