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.
The lie of wealth-creation via SIP in mutual funds
Posted on 12 Feb 2023
Author: Sayan Sircar
Tags: 
Mutual Funds
6 mins read
Mutual Funds
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This article shows you that investing via SIP in a mutual fund does not create wealth.
Summary:
- We discuss how the Systematic Investment Plan (SIP) in mutual funds does not always guarantee wealth creation.
- We use data from a Nifty 50 index fund since 2006 to show that even though the chances of making a profit are higher with longer investment periods, running an SIP in an equity fund does not always mean wealth creation.
- We then explain that the end value of the portfolio after an investment period is unpredictable, which makes it hard to plan around.
- A recurring deposit or SIP in a debt mutual fund over 10 years would have given a similar return as the worst-case portfolios.
- We then provide an alternative, which is to start investing with a specific corpus amount in mind instead of chasing an arbitrary rate of return.
📚 Topics covered:
- Defining SIP, SWP and STP
- Preparing the data for rolling SIP duration
- Result from actual SIP data
- Best and worst performing 10-year SIP
- What is the alternative?
Defining SIP, SWP and STP
All of these are standing instructions that get executed as per a schedule you specify:
- Systematic Investment Plan (SIP): Money from a bank account is invested into a mutual fund, typically once a month
- Systematic Transfer Plan (SIP): Units from a mutual fund are redeemed to invest in another mutual fund of the same AMC
- Systematic Withdrawal Plan (SWP): This is the reverse of the SIP. You sell the units from a mutual fund to send money to a bank account
This article will show how having a SIP in a mutual fund may not necessarily guarantee that you will create wealth.
The followup article, about SWP when you are ready to draw down your portfolio is here: The lie of enjoying financial freedom via SWP from mutual funds
Preparing the data for rolling SIP duration
We have taken data for a Nifty 50 index fund since 2006 and calculated returns for multiple durations. The chart below shows this fund’s 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.
Result from actual SIP data
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 ₹10,000/month for 120 months, the amount invested is ₹12 lakhs, and the end portfolio value fluctuates from ₹15 lakhs and ₹28 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 child’s college goal with a ₹20 lakh target. Your final result varies between ₹15-28 lakhs. That is an unacceptable amount of variation. As the XIRR chart shows, the lowest-value portfolio that reached only ₹15 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 ₹1 lakh/month SIP for 10 years would have made a corpus of ₹1.5-2.8 crores. The lifestyle that is sustainable with ₹1.5 crores is very different from that is possible with ₹2.8 crores.
Best and worst performing 10-year SIP
Worst performing 10-year SIP
Predictably, the worst 10-year SIP with only 4% XIRR at ₹15 lakhs final value happened due to the COVID-19 pandemic. The investment period was from Jan-2010 and ended in Mar-2020.
Best performing 10-year SIP
The best-performing SIP with a 16% XIRR and ₹28 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 “wealth-creation”, 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?.
What is the alternative?
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:
- SMART goals: investing step-by-step for buying your dream home
- What is the best way to invest for your child’s college education?
- A low-stress step-by-step guide to creating a retirement portfolio
Ask yourself these questions
- Are you getting the correct type of service from your advisor to help you reach your goals?
- Do you know the target corpus for your investment goals?
- Do you know which products you are invested in and why?
- Are you chasing “wealth” or on track on goals?
Related Articles
- What is a step-up SIP and how much more wealth does it create vs. a normal SIP?
- Does a step-up SIP provide a higher return than an ordinary SIP?
- SIP, SWP and STP - what do they mean, which one should you choose and when?
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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
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