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

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Interesting Insight

Posted by Muthu on July 12, 2013

Being in this profession, I get access to various promotional and learning materials. I found one such material received from IDFC mutual fund yesterday very interesting and thought of sharing the same with you. 

They have done a study with past Sensex data for the period 1990 to March 2013. In the following table, they have calculated when the past 5 year Sensex SIP returns is the range of <=0% to 20%+, what has been the corresponding subsequent 5 year Sensex SIP returns. 

Past 5 year  SIP returns               Next  5 years SIP returns range
                Minimum         Maximum
<=0 27% 48%
0-10 (We are here now) 15% 37%
10-20 -1% 24%
20+ 1% 18%


To explain, if the last 5 year Sensex SIP returns falls between 0% to 10% range (which is the current scenario), the next 5 year Sensex returns has been in the range of 15% to 37%. In the scenario of last 5 year returns being the range of 10% to 20%, the next 5 year returns falls any where between -1% to 24%.

Inference: If you wish to make an investment for 5 years, then the range of SIP returns that you are likely to experience over 5 years depends on how SIPs have done in the last 5 years. It is always beneficial to invest in markets when markets are cheap, past returns have been poor and nobody wants to invest (range of returns could be anywhere between 15% and 48%). Investing when markets are inexpensive is the secret to making better than market returns. So it is recommended to invest for a 10 year period, if the past 5 year SIP returns have been good and the markets have become expensive.

 You all know that we suggest equity SIPs usually for a period not less than 10 years. In the following table, they have calculated when the past 5 year Sensex SIP returns is the range of <=0% to 20%+, what has been the corresponding subsequent 10 year Sensex SIP returns. 

Past 5 year  SIP returns Next  10 years SIP returns range
           Minimum          Maximum
<=0 12% 22%
0-10 (We are here now) 19% 22%
10-20 20% 21%
20+ NA NA


Inference: In all the scenarios, an investor has made a double digit returns if the SIP investment tenure has been 10 years. If you plan to invest in SIP for the long term (a 10 year period) it can be observed that investor could make good returns no matter when they invest (i.e. when the past SIP returns have been high or low). The range of returns for SIP has been reasonably high when investing for a 10 year period (anywhere between 12% and 22%)

 Points to remember:

 1)     If you wish to invest through SIP for 5 years, one should look at the returns in the last 5 years. Bad returns in the past will make good returns more likely in the future and vice versa.

 2)    If you wish to invest through SIP for 10 years, past returns have no bearing on future returns and therefore one can enter a 10 year SIP at anytime.

 3)     Though range of returns indicated what one can expect, it doesn’t mean that returns at any point of time will not fall out of range. It just means that returns at the end of the time period have a high likelihood of lying in that range.

 Good returns come to those who wait. And better returns to those who wait and invest regularly. A longer period is essential to realise the full potential of compounding.

 In the above calculations, data of Sensex returns has been taken. There are good number of actively managed funds which have done better than Sensex. So far, in India, active management scores over passive management.

 If you are investing 10 year or more through SIP, across market cycles, there is no need to time the market in any sense. Investing regularly in a good portfolio of funds would help you reach your financial goals.

 Please consider SIP as a way of investing your money every month like an installment. In home loan, the monthly installments give you a house. In SIPs, monthly installments create financial asset to fulfill your financial goals – be it retirement or your child’s education.

 Please do stay the course and never forget SIPs pay you back very well over long term.

 Working Notes:

 1)     Source: IDFC mutual fund learning material

2)     Sensex data considers value from 1990 till March 2013

3)     From 1990, we have taken 5 year SIP returns for the Sensex as on every month end. All returns are classified into buckets (<=0, 0-10, 10-20, 20+). For each return value of past 5 year SIP, the corresponding 5 year / 10 year SIP return value received is calculated to arrive at minimum / maximum values for a particular bucket.

4)     So far no data series exists, where past 5 year SIP returns have been 20+ along with a corresponding 10 year SIP returns.

5)     All numbers have been rounded off to their nearest whole number.

2 Responses to “Interesting Insight”

  1. Shankar said

    Hi Muthu,
    It’s really rare to see the equity’s return with facts. You have done a fantastic job on it. Thanks for that. I came across this article on end of UK ( http://pro.moneyweek.com/myk-eob-tpr123/LMYKP604/) and how various government across world with deep economic trouble looted from its own people.

    With your knowledge, what do you think whether this thing will happen to India? If so, what as an investor can do to escape from the government’s looting ?

    Appreciate your thoughts on this.

  2. Muthu said

    A more balanced view from Warren Buffett: http://dailyreckoning.com/the-road-to-squanderville/

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