Whoever said volatility is bad for equity investments? Those who invested in mutual funds through the systematic investment plan (SIP) route have benefited the most from fluctuating share prices over the past 2-3 years. While top equity diversified funds have returned 16-18% in three years, SIP investors have earned returns in the range of 25-28% (investing into the same funds) during the same period.Supposing an investor has invested Rs 1,000 every month (between November 23, 2006 and November 23, 2009), he would have pocketed a 31% return on his Sundaram BNP SMILE Fund, 29% each on ICICI Prudential Discovery Fund and Birla Sunlife Dividend Yield Fund and 28% on his HDFC Equity Fund.
The investor would have made more ‘risk adjusted’ money than investing directly into stocks (Sensex three-year return being 25% on a compounded basis). In all cases, the investor would have made more money than any high networth individual (HNI) who had invested lumpsum into any of the above funds, unless the HNI managed to enter at the lowest level.
“SIP portfolios have yielding better returns because of the deep-market correction in mid-2008. Volatility provides a perfect setting for high-return SIP investments,” said Gopal Agarwal, equities head, Mirae Asset Investment.
According to fund managers, though there will be a slight erosion in net asset value (NAV), a market crash will not have much of an impact on the overall performance of the SIP. In fact, investors get more units for the same amount of money in falling markets. The units bought at lower price-levels will appreciate when the market turns around, adding to the overall portfolio value.
Lumpsum investors can only invest at one level of the market (in this case at 13,680 levels, Sensex as on November 23, 2006). Their investments went through a cycle of dips and surges, but they could not buy fresh units at lower market levels.
“The variance in the performance of SIP and lumpsum investments is mainly due to the fact that SIP investors would have picked up additional units during the downturn. SIPs route is ideal for small investors as it makes market fluctuations work for them,” said Jaya Prakash K, head-products, Franklin Templeton Investments.
Though one cannot make a direct comparison of benefits (between SIP and lumpsum MF investment), SIP is usually considered a sound investment strategy in range-bound as well as volatile markets, as you would not be locking your capital at one go. Performance of SIPs in the short term, however, depends on the extent of liquidity in the market, liquid cash position (non-invested part of the fund) and portfolio composition.
“Lumpsum investments (in MFs) look good in a constantly rising market; SIPs are better in falling and volatile markets,” said Anand Shah, head-equities, Canara Robeco Asset Management.
“Over a longer term (10 years and more), both investment styles yield decent return pattern for investors. For instance, if you had made two investments at the peak level and at the trough level in a given month, the difference in return at the end of 10 years would be hardly 1%,” Mr Shah added.
It is in this context that wealth managers are asking affluent investors to adopt value averaging strategies while making lumpsum investments. In value averaging investment (VAI), the investor sets a target growth rate or amount for his portfolio each month, and then adjusts the next month’s contribution according to the relative gain or shortfall made on the original asset base.
Though VAI has no historical references, returns (asset growth) could well be very close (or a bit high) to those offered by investments through SIPs, say experts.
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