The lie of wealth-creation via SIP in mutual funds
This article shows you that investing via SIP in a mutual fund does not create wealth.
This article shows you that investing via SIP in a mutual fund does not create wealth.
All of these are standing instructions that get executed as per a schedule you specify:
This article will show how having a SIP in a mutual fund may not necessarily guarantee that you will create wealth.
Join the Arthgyaan WhatsApp community: You can stay updated on our latest content and learn about our webinars. Our community is fully private so that no one, other than the admin, can see your name or number. Also, we will not spam you.We have taken data for a Nifty 50 index fund since 2006 and calculated returns for multiple durations. The chart below shows this fundās returns for a SIP for 1-year, 2-year, 3 years, 5-year, 10-year and 15-year durations. Unfortunately, since the data is from 2006 when daily NAVs became available, we do not have data for 20-year SIP in rolling form. We have taken NAV data from AMFI and calculated all possible SIP results for a 10-year investment period.
We invest once a month for 120 months and then value the portfolio after 120 months. We then roll the period by one day and recalculate. Since we started in 2006, there have been over 1600 such windows. These results are for a constant SIP. We will cover the results from a step-up SIP in a future article.
As the chart above shows, the more the investment period, the higher the chance of making a profit. However, just running a SIP in an equity fund does not mean you are building wealth. We will explain below.
The chart shows 100 of these portfolios equally distributed from the 1600+ portfolios we calculated. However, as the chart shows, the ending values of the portfolio are entirely random, and there is a wide variation.
Since we are investing ā¹10,000/month for 120 months, the amount invested is ā¹12 lakhs, and the end portfolio value fluctuates from ā¹15 lakhs and ā¹28 lakhs.
Here is the crux of the problem. If we go by the narrative of
Start a SIP to create wealth
then all the 100 SIPs have created wealth. But the wealth amount after 10 years is unpredictable at the starting point.
Imagine that you are investing for a childās college goal with a ā¹20 lakh target. Your final result varies between ā¹15-28 lakhs. That is an unacceptable amount of variation. As the XIRR chart shows, the lowest-value portfolio that reached only ā¹15 lakhs gave a return of only 4%. A recurring deposit or SIP in a debt mutual fund over 10 years would have given a similar return.
A bigger problem happens if the SIP is supposed to create a retirement corpus. Using the exact numbers, a ā¹1 lakh/month SIP for 10 years would have made a corpus of ā¹1.5-2.8 crores. The lifestyle that is sustainable with ā¹1.5 crores is very different from that is possible with ā¹2.8 crores.
Predictably, the worst 10-year SIP with only 4% XIRR at ā¹15 lakhs final value happened due to the COVID-19 pandemic. The investment period was from Jan-2010 and ended in Mar-2020.
The best-performing SIP with a 16% XIRR and ā¹28 lakhs final value was started in Jul-2011 and ended in Jun-2021. As the result shows, just a variation of a few months for starting date led to a drastically different ending value.
This result shows that running a SIP in an equity mutual fund may or may not create wealth. If the end result is uncertain, then the process does not work. So if you are investing in the hope of āwealth-creationā, that may stay in the realm of wishful thinking.
We have additional data for other holding periods in this article: Should Indian investors invest 100% in equity for their goals?.
When you start investing, instead of fixing on a return in mind say 12% which is not under your control, start with a corpus figure that you want to reach: Why you should chase your target goal corpus instead of returns
That corpus will be used to pay for a known goal in the future:
Ask yourself these questions
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This post titled The lie of wealth-creation via SIP in mutual funds first appeared on 12 Feb 2023 at https://arthgyaan.com