Wise Wealth Advisors

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

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Choosing the worst day for SIP

Posted by Muthu on December 17, 2015

I was going through a data in the investor education material provided by PPFAS mutual fund. I found it interesting and wanted to share the same with you.

We repeatedly tell you that what matters is buying wisely and then simply staying the course. There is no need to time the market. Investing all through ups and downs, across market cycles for a long term is the key to create wealth.

Let us assume 2 investors started investing Rs.10,000 a month in Sensex from January 1990. Like you, they are not smart enough to invest in good actively managed funds and instead have chosen Sensex.

Also like you they did not choose a fixed date for monthly SIP. They wanted to time the market and choose the lowest point for Sensex every month.

One of them was very lucky and was brilliantly able to do it. The other person was dumb like me who did not have the capacity to time the market and instead ended up choosing the highest point for Sensex every month.

Decades passed and after 26 years (25.91 to be precise), they wanted to compare their performance on 30th November 2015.

The brilliant investor, who always invested in the lowest point of Sensex every month, has created a tax free wealth of Rs.2.01 crores. This works out to an annualised return of 11.68%.

The dumb investor, who always invested in the highest point of Sensex every month, has created a tax free of wealth of Rs.1.88 crores. This works out to an annualised return of 11.32%.

The difference between most brilliant and the dumb is 0.36%.

What matters is the discipline and not how lucky or brilliant you are. In the above example, both chose wisely; diversified portfolio of stocks.

As long as you choose wisely; only open ended diversified equity funds and no closed ended NFOs, sectoral or thematic funds or individual stocks, then what matters is discipline of simply staying the course.

Why I’ve included individual stocks also because you need to time the entry and exit for stocks. Instead if you choose a portfolio of stocks like mutual funds or index; the fund manager or the exchange automatically takes care of entry and exit. ‘Buy & Hold’ is applicable to portfolio of stocks and would not always be applicable for individual stocks.

I want to tell you one more thing. Your mutual fund portfolio may consist of 5 or 6 funds. You need to only look at overall portfolio performance and not worry about relative under performance of one or two funds. In any portfolio, some funds would outperform and some underperform in a given year. If you a take a 10 year track record, any good fund would have gone through rough patch for 3 or 4 years. There is no fund or fund manager who can escape bad years. So it is better to look at 10 year averages. Funds need to be changed only if they consistently underperform benchmark over long run or there are any major negative issues happening in the fund house etc. Churning in the portfolio needs to be very minimal and done only when absolutely necessary.

If you keep churning, your returns would not be equal to fund’s long term returns. Despite being invested, many people don’t make good returns in equity funds because they chase performance; invest after few good quarters and redeem after few bad quarters.

We would be entering soon into 10th year of our profession. Clients who have been with us from beginning have seen excellent returns for last 9 years. Their returns are equal to what funds have actually provided. Investor returns is equal to investment returns. There is no loss or decrease in returns due to behaviour gap. The same holds good for clients who are with us for 8 years, 7 years etc.

Only around 2% of investors stay beyond 10 years in a fund and reap the benefit of long term compounding the fund has to offer. The remaining 98% keep churning, redeeming and lose out on the long term wealth creation.

We want all our clients to be amongst this precious 2%. So we’ll keep portfolio change or churning as minimal as possible.

We believe the greatest value addition we do is making you stay the course.

We request your co-operation on this so that you can create huge wealth through uninterrupted long term compounding.

5 Responses to “Choosing the worst day for SIP”

  1. Jayesh Trivedi-TenderTiger said

    sir,

    I have been investing in HDFC Top 200 & Quantum Long term fund for last four years but their performance is not good enough for last two years. I am a risk taker can I invest in DSP blackrock small & micro cap fund .Pls guide me

    Regards, jayesh Trivedi.

  2. Truth said

    If the same guy saved the 10k/month just for a year or two in a FD and invested the proceeds in land he would have 100x his money

  3. Siddhartha said

    Well explained and clearly understood…..the importance of staying the course.

  4. SAJU Nair said

    Very well explained.. Thank you.

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