Historical data proves that high double-digit returns can be easily generated by long-term SIP. Periodic investments in mutual fund schemes are called SIP or Systematic Investment Plan. Investors often wonder how long term would be good enough? Investors often wonder if they should cash out SIPs at this time when they are making money. Obviously, investors are scared of redeeming at the wrong end of the equity cycle.
Let’s understand Systematic Investment Plans and how it works. As we all know, SIP is an automatic mechanism of investing a fixed amount. When markets are low, investors buy more units and vice versa. This phenomenon is called as The Rupee Cost Averaging.
If we study from the year 2000-2016, a period of 16 years. BSE Sensex was over 6000 in the year 2000. From the year 2000, Let us presume the SIP started ion bull run of 2000. Sensex tanked to 2200 in the year 2002. BSE Sensex crossed 6000 in the year 2005. Thereafter, it kept on scaling new peaks. There were 33 corrections of over 10% between 2005 and 2008. It crossed 20000 in the year of Dec 2007. And then fell to 9000 in Oct-Nov of 2008. Between Nov 2008 and may 2009 it remained in the region of 9000. In Nov 2010, it again breached 20,000. Thereafter, it went back to the level of 15,000. It remained there for a considerable period. Rising and crossing again 20,000 with the impact of the new Modi government in 2014. In mid-2015 it breached 30,000. In Feb 2016, it touched around 22,000. It was nearing 27,000 as on June 2016. Then came demonetization. It tanked by a few thousand points again. As we write this article in Sep of 2017, BSE Sensex has crossed 32000. A sip from the year 2000 (in a well performing diversified equity fund) has given a staggering return of over 19% CAGR. Now imagine, if an investor would have redeemed in the year 2005 or even 2007 Dec.
Thus, we can say, that SIP is a long-term investment plan. All period, political, economic and business cycles generate returns for a sip investor. In fact, steeper the downturn, better are the SIP returns. As long as the economy is growing (like India) investors may be able to generate double-digit IRR by investing in long-term SIPs.