Wise Wealth Advisors

D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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New Investors: Evaluating your MIP, SIP and Lump Sum

Posted by Muthu on December 25, 2010

We’ve grown in the profession significantly during the year 2010.

We’re fortunate to have added lot of new clients.

Thanks for your trust.

What I’m going to say today would serve as a positive reinforcement.

For the investors who have been with us for 3 years or more, this would be a confirmation of their experience.

As you are aware, Monthly Income Plans (MIPs) invests predominantly into debt like Government securities, credit agencies rated bonds, CDs etc. and a small portion into equity.

Performance of MIPs are hence dependant on both debt and equity markets.

Like every other market, debt and equity markets are cyclical.

Some times both may perform well, some time one would perform well and there may be times when neither performs well.

That is why we recommend MIPs with a minimum 5 year tenure, barest minimum being 3 years.

Though MIP is not a guaranteed return product, it is capable of producing few percentage points over and above a fixed deposit, if held for 5 years and more (as long as you want).

A few percentage points increase in returns is very significant for debt oriented products.

Unlike fixed deposit or small saving where the growth is even, in MIPs, due to the cycles mentioned above there may be bouts of under and over performance but if held for the period mentioned above, the overall annualized returns are likely to be superior to the above  products.

MIPs can be considered in addition to small savings and fixed deposits in one’s portfolio and not necessarily as their substitute.

People with some risk appetite can go more for MIPs.  

You would have seen interest rates being lower around 5 years ago, higher interest rates during 2008, subsequent reduction in interest rate and again a recent hardening of short term interest rates.

Likewise equity markets have also gone through various cycles in the last 5 years.

Despite all these, some of the MIPs we recommend have given a double digit annualized returns for last 5 years.

For people requiring regular fixed monthly income, the same can be done through Systematic Withdrawal Plans (SWPs).

As for your SIPs are concerned, please understand that you’ve opted for it to build wealth over a long term to meet goals like your retirement, children’s education etc.

Considering the growth rate we are expected to see in next few decades, we advise you to regularly invest through SIPs for not less than 20 years.

The barest minimum period should be 10 years.

I would suggest that you neither get elated if the short performance is good nor get dejected if it is bad.

SIPs need to go through various market cycles in the long run to provide decent annualized returns.

If you’ve invested through SIPs in one of the equity fund we recommend, during the last 10 years it has given an annualized return of 34.14% (as of November 30th 2010).

Though the above SIP returns look very attractive, you need to know that the journey would have been bumpy during the above period. Only someone who would have ignored noises, completely avoided short term perspective and has taken a long term outlook would have done well.

If you start looking at your SIP month after month, you would completely loose sight of your long term goal.

Let your SIPs keep going through bull and bear markets. Remain detached. You would reap the benefit in the long term.

In a fast growing economy like India, equities are the best asset class to own for long term and the ideal way to participate is to invest regularly through SIPs in good mutual fund schemes.

Also as your portfolio may consist of different kind of funds like large cap, midcap, smallcap and multicap, you may see different funds performing better at different times. All the funds need not perform in the same way at the same time. 

For those of who you who have invested or want to invest in equity through lump sum investment, please do it provided if your investment outlook is not less than 10 years.

The major mistake people make in lump sum investments are frequently trying to time the entry and exit. Timing the market is an exercise in futility. If you try doing this, you may end up as a looser. Please read the page ‘Time or Timing’ in our portal for more details.

In the same equity fund illustrated above if you have invested a lump sum and have stayed invested since inception (around 16 years), the annualised returns as of November 30th 2010 stand at 23.70%

You would have got this superb return despite numerous peaks and valleys that markets went through during the last 16 years, provided you did not keep trying to time the entry and exit and instead stayed invested through out the 16 years period.

Do not time the market. Instead stay for more time in the market.

Completely ignore the short term performance, either if it is good or bad.

Disclaimer: Various products, schemes and methods discussed in the above article are pertaining to mutual funds. Mutual fund investments are subject to market risks. Mutual funds are not guaranteed return products. Past performance may or may not be sustained in future. Sensex has given around 19% annualized returns in the last 30 years. Please read the scheme related documents carefully before investing.

5 Responses to “New Investors: Evaluating your MIP, SIP and Lump Sum”

  1. Manish Jain said

    Hi Muthu,
    I am a regular reader of your blog. Very good articles. Just that they are very HUGE…most of the times 🙂
    Just for my finding, I researched a lot of top MF, one of which gave maximum around 22% CAGR (Which is 680% absolute returns) during the last 10 years. This was when investments were SIP based starting Dec 2000 and ending Dec 2010
    I am not sure about 34% CAGR product is existing? Is it your calculation error or typo error.
    How did you calculate? Just if you can share.


  2. deepak said

    34% CAGR

    are you doing any mistake in calculation ?

  3. Muthu said

    It is based on the fund fact sheet.

  4. What kind of fund sip do you suggest for long turm ?

  5. Muthu said

    Request you to meet and have a consultation with a Certified Financial Planner or an Investment Advisor.

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