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Equity Mutual Funds SIP Period: How Long is Good Enough to Realize “Good Returns”?

Simple answer: SIP it as long as you can

A bit more complex answer: For the long term. Never mind there is no standard definition of long term. Ditto for “Good Returns” too!!!

Super complex answer: It depends on how much notional loss you can assume yourself being ok with. Yes – until you sell, loss (or gain) is all notional. Like the home you live in has gone up maybe X times the price you paid but all the gains are notional till you decide to sell it and move over to a cheaper place.

But I digress. Back to SIP period.

If one want’s to keep it real plain and simple, there is merit in going by excellent advise rendered by investment guru Benjamin Graham is his book “The Intelligent Investor” where he quotes results from a researcher as:

“In Lucile Tomlinson’s comprehensive study of formula investment plans, the author presented a calculation of the results of dollar-cost averaging in the group of stocks making up the Dow Jones industrial index. Tests were made covering 23 ten year periods, the first ending in 1929, the last in 1952. Every test showed a profit either at the close of purchase period or within 5 years thereafter. The average indicated profit at the end of the 23 buying periods was 21.5%, exclusive of dividends received. Needless to say, in some instances there was a substantial temporary depreciation at market value”

 

But most of us can’t do without making our lives complex. Why change the winning formula? We will focus on the third option. Latest market crash scenario was seen in March 2020, owing to Covid 19 panic. Let’s see how SIPs in Nifty 50 index on monthly basis, fared ending March 2020!!!

Scenario 1: You want to avoid notional loss totally. In such a case, you need to SIP it for at least 7 years to ensure you are in positive territory, and that too marginally. You still did not beat fixed income return for the period, though. In fact, even for 10 year period, index annualized gains were below 5% and index tracking mutual funds gains even lower due to tracking error (costs). Long term, in such a worst case scenario just served as capital protection tool.

Scenario 2: For 3 and 5 year period, portfolio was deep in red. It doesn’t matter by how much – most of people SIPing it would not be ok with even a 1 rupee loss for such a “long term” SIP portfolio.

How about the period ending March 2019 and March 2021? Just one year here and there…

First, March 2019 check: 3 year, 5 year, 7 year and 10 year  - all period SIPs gave double annualized returns. Ditto for SIPs ending March 2021.

Now things don’t look as bad.

Moot question – should you base your life or investments on once in a century worst case event, as COVID 19 situation was?

Maybe no. Though no harm being aware of the worst case scenario till one doesn’t let them at the very least govern significant part of your investment decisions. Such action will mostly be net worth accretive!!! Seems it makes sense to go by advise rendered by Benjamin Graham and prefer to SIP it for a decade, though never less than 5 years!!!

That said, each to their own. Don’t take this blog / post as investment advice.

Data source: through various publicly available resources. Search it!!! 

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