Retail investors keep on debating if long Term SIP’s (Best Systematic Investment Plan) are risk-free or not. There seem to be unanimity amongst Industry experts, that the SIP’s with a tenure of minimum seven years can reduce risk significantly, but cannot completely eliminate risk. Data from BSE since 1978, also prove that staying invested for a minimum period of 7 years, have always yielded positive returns. And SIP for a minimum period of 7 years have yielded high double digit returns.
Investing community often get confused if past data will hold water for all times to come. Theoretically, It may not. Risk is integral to any investment. More so, in Equities and Equity Mutual Funds. Stock market data from last 38 years point out that equity markets deliver best returns in the long term but can be extremely volatile in the short term. The reason behind this is the fact that, since equities are traded on daily basis investors give more weightage to factors like political uncertainty, global events, inflation, interest rates etc. Whereas, in the long run factors like infrastructure growth, falling dependency ratio, asset outperformance, wage rates and Macro potential in an economy take charge.
Furthermore, it has been seen that equity investors are interested in long term wealth creation and short term returns do not fulfil any financial objective either. Long term investments reduce risk and generate solid wealth. SIP has proved to be a boon for retail investors. It mitigates risk and provides flexibility of increasing and decreasing the investment amount.
Now let us look at 2 examples, that prove our point. Let us take Franklin India Prima Fund, inception year 1993. The SIP return in the last one year (as on 26th May 2016) is 7.15%, whereas returns for last 23 years is a whopping 22.56% CAGR. Similarly, Franklin India Blue-chip fund was incepted in the year 1993. Here too last 1 year returns (as on are 25th may 2016) is 4.18% and for last over 22 years is staggering 21.24%.
Hence, we can see that how long-term investments through have showcased a larger growth with the lesser amount of risk. However SIP Mutual Fund, investors should never forget the mutual funds are subject to market risks. Therefore always consult your mutual fund advisor before making an investment.