SIPs: Best for long term

If we had the skill to choose three or four stocks that will be the outperformers and do an S.I.P. in that for 10 years, we have created a strategy to beat market returns.

The last two to three years have shaken many “truths” in the stock markets. We always thought SIP was a better way to invest than a point to point investment, since we did not have to worry about the ups and downs of the markets. I also think so.

However, just look at a two-year period, with regular SIPs on 1st of every month. If I had an SIP of Rs 1,000 a month in a Nifty ETF, which got initiated on first of April 2014, in two years, my Rs 24,000 would have been worth around Rs 22,000. However, the Nifty on the first date was around 6721 points and on the last date was 7738 points. In other words, if I had bought the index on the start date and did nothing, I would have made a return of just over seven per cent per annum. If I go back and seek an SIP return over a five year period, then my investment of Rs 60,000 has grown to around Rs 69,112. Again a very disappointing return that is worse than a savings bank return.

After reading the above paragraph, are you wondering whether SIP is good or bad I do not blame you. None of us have answers. Of course, we all know the perils of ‘point to point’ returns. To overcome that, we advocated investing through the SIP route. I can confuse you a bit more by telling you that if the SIP were in ICICI FMCG Fund instead of the Index ETF fund, the SIP amou-nts of Rs 60,000 would have been worth Rs 82,765 on the end date. This is a near 12 per cent compounded annual return!.

I am giving the above instances just to bring home the point that equity investing is a long-term game. It is a 10 year plus idea. And investment is to be done with money that you can comfortably forget. I agree that loss hurts everyone, but the key thing is that the money we set aside for equity investing is something that will not hurt us badly. For instance, if you need to save for a fixed need at a precise time in the future, it would be unwise to use the equity route for that. You cannot predict what the markets will be over the future.

Ten-year SIP returns for most of the equity schemes and the index will be in the 12 to 18 per cent per annum range. Time is an important element in any investment strategy. If you can add skill to your patience, your returns could go higher. If you take the Nifty, it has 50 stocks, each with a different weight in the index. A few stocks will give higher than average returns. A few will give lower than the index returns. Simple arithmetic.

If we had the skill to choose three or four stocks that will be the outperformers and do an SIP in that for ten years, we have created a strategy to beat market returns. However, it needs that bit of skill to analyse a company, and read some part of the future. Maybe we could use the highest ROE companies, to create a basket of four or five stocks. Or simply pick up sectors like pharma, FMCG and banking. We believe that these three sectors will lead the economy and less vulnerable to economic cycles.

It is amazing how we never bother about our investments in real estate or gold. We always benchmark two prices — the price at which we bought and the current price. We never factor in the time that has elapsed. And even if the price is below our purchase price, we console ourselves saying that it is a matter of time. These two assets have destroyed wealth over the last few years. However, we never seem to panic. We think gold will always go up. And when it comes to real estate, we think that “my’’ investment is different. Better location, better quality, corner etc., and we console ourselves. And we never factor the fact that when we sell, we will pay taxes- Even if you have earned a lakh after ten years, you have no escape.

Thus, equities are about giving it time and attitude. Unless we are foolish and put all our money in to one stock or one sector and gamble like we do in real estate. As an asset class, equities is the only class that offers us a hedge against inflation. And if we believe we are in an economy that is growing, is it not natural that equities have a better chance to give returns

(The writer is an independent analyst and can be contacted at balakrishnanr@gmail.com)