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Why SIP returns are lower than lumpsum investments

You must have heard at least a hundred times that Systematic Investment Plans (SIPs) are better than lumpsum investments when it comes to returns. Here is the thing - SIP returns are not always better than lumpsum investments. SIP-ping is many things, but not a guarantee for better returns. Not convinced? Let’s look at figures to prove it.

The one-year SIP returns of 97% of equity funds are actually lower than lumpsum investments done one year ago in the same funds. Did you say, one year is too short a period? Well, three-year SIP returns of 87% of equity funds are also lower than lumpsum investments done three years ago in the same funds. The trend also holds when it comes to five years. DNA Money spoke to fund experts to understand what is happening and what’s the future. 

SIP pe charcha 

Indians have woken up to SIP like never before. It’s like a new brand of tea that everybody wants to taste. Agreed, SIPs have certain inherent advantages. 

One, they allow you to invest a fixed amount in a mutual fund scheme periodically at fixed intervals. That works well if you don’t have a lumpsum investment. 

Two, the SIP installment could be as little as Rs 500 per month. Ordinarily, you can’t buy even one share of some great quality firms. But a Rs 500 SIP theoretically allows you to participate in the same stocks that legends like Rakesh Jhunjhunwala invest in. 

Three, SIPs allow rupee cost averaging, which means your average cost is low because you keep on buying units at a far more regular frequency. Hence, you accumulate more units at a lower cost on an average. 

Plus, it brings in discipline and you do not worry about timing the market. Naturally, the number of mutual fund SIP accounts has raced to 2.44 crore and is regularly bringing in over Rs 7,000 crore money every month for the MF industry. 

Lumpsum investment usually works for those who regularly track the markets, are able to predict market movements and time their investments accordingly. More importantly, lumpsum investments is a choice only for those who have large investible surpluses. 

“For most investors, SIPs is a more realistic option. It also enforces regular and disciplined investing from your monthly income. It also does away with the need for market tracking or timing, which is difficult for majority of retail investors and, hence, not advisable. By entering the market in smaller amounts, SIPs allow the investor to benefit from market upsides as well average their investment cost during market corrections,” said Manish Kothari, director & head of mutual funds, Paisabazaar.com.

Optimal tool, but not for returns 

We looked at hundreds of equity funds to see how SIP returns (done on the first of every month) shape up against lumpsum investments at different periods. The lead in favour of lumpsum strategy is quite big in many cases, with lumpsum returns 10-20% points higher than SIP across one year. Overall, one-year lumpsum returns in 353 of 364 funds are higher than SIP strategy. The gap is not a one-year phenomenon. 

Those who had done SIP for three years can see the same trend. In many equity funds, lumpsum investments have given 5-10% points more than SIPs in three years. Overall, the lumpsum strategy has won in 282 of 326 funds in three-year time period. In the last five-year period, lumpsum strategy in 261 of 283 funds has beaten SIP returns. 

Experts feel much depends on the period that one takes to compare. “For example 2011-15, the five-year period would have seen SIP do significantly better than lumpsum, as the volatility in-between was well-captured in an SIP. The larger point here is that SIP is not meant to be a tool to generate superior returns to lumpsum,” said Vidya Bala, head, mutual fund research, FundsIndia.

In a rising market, lumpsum investments in mutual funds register higher returns than SIPs. Lumpsum investment is a one-time investment, whereas SIPs involve periodical investment at monthly or quarterly intervals. “Hence, the cost of purchase of a lumpsum investment in a rising market would always be lower than the average cost of SIP. As equity markets have registered significant gains over the last five years, lumpsum investments have generated higher returns than the SIPs,” explained Kothari.

Give more years to SIP

Some experts feel that the concept of SIP is for the long term. When they say long term in equities, they mean seven to 10 years of investments. Abhinav Angirish, founder, Investonline.in says: “SIPs work on averages. If you are a SIP investor for five years, it means on an average, you are invested for a period of 2.5 years, which is anyways not enough. There is no point even discussing one year of SIP, as it a very small period.”

Many SIPs helped buy MF units over the higher end of the curve. “SIPs are to overcome steep market fluctuations (either side) and generate moderate returns blended with disciplined investing. Over the last 15 years, equity SIPs have given an average of 20% IRR, which are more than any other asset class,” argued Angirish.  

SIP investors with a long-term horizon would surely benefit from market correction. SIPs will buy them units at lower Net Asset Values, which will reduce their investment cost and thereby, generate higher returns, in the long run, said Kothari.

The SIP strategy cuts chances of losses far more consistently. “No doubt over 10-year periods or more lumpsum should and does outperform. However, in shorter time frames of three, five, seven years and so on the volatility between two points are better captured by SIP. Why take these periods? Because chances of equity delivering negative point-to-point returns exists. But in a SIP this is far diminished and in fact nil over a five-year period or more,” said out Bala.

The very idea of SIP is not to time the market. Hence, instead of worrying about when the averaging will happen, investors should focus on the savings needed to reach their goal. 

WHEN LUMPSUM RETURNS ARE HIGHER?

·         In 353 out of 364 funds over one-year period  

·         In 282 out of 326 funds over three-year period  

·         In 261 of 283 funds over five-year period

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Mutual Fund Investment: Should you invest in MFs when the stock market is down?

In a situation where the stock market is down, you can actually give yourself a ‘smart investor’ tag by buying more units of mutual funds to benefit out of the crash. mutual fund investment, mutual funds, MFs, stock market, SIP, stock market crash, stock market down

Mutual Fund Investment: It is always a good idea to invest in mutual funds for a long term as short-term investments are too risky. The world today is unpredictable and we see a lot of uncertainty, complexity and volatility when it comes to investing in mutual funds. Though people now understand about what type of mutual fund they should invest in, they are still largely unaware about when is the right time to invest in the bull market via mutual funds.

Considering the beating that the Indian stock market is taking, mutual fund investors face the wrath every time the market tumbles, often leading to discontinuation of their SIP investments without having any knowledge that how can market crash actually help them get better returns.

Should you sell mutual funds when the market is down? It is true that the market fall does give you jitters, but selling your funds is not the only way out. In fact, you should quickly get up and get back in the game. Always remember, mutual fund investments are best made for long terms and few ups and downs are very much a part of the journey. So, during such times, it is best to stay calm and think of ways out to deal with the situation.

So, what should an investor do?

Don’t time the market It is practically impossible to predict the behaviour of the stock market on a certain day. When there is a market crash, the Net Asset Values (NAV) of the fund falls, creating a panic-like situation among the investors. This, in turn, leads to investors stopping their funds or redeeming it. Volatility is inherent to equities. There is not really a strategy in place which one can follow as to when to make a mutual fund investment. As it is highly impossible to time the market, it is always a good idea for an investor to invest in mutual funds when the market is low. In fact, the worst the market gets, the better it is for the investor.

Benefit from the lower NAV Remember, mutual funds follow the rupee cost averaging, meaning that the number of units purchased depend on the existing Net Asset Value. Also, NAV decreases during the market crash. So during such a situation, an investor can purchase a high number of units, if eyeing for a long-term investment. However, one must ensure that the portfolio has good growth prospects and would fetch better returns in the future.

Take the SIP route We all are aware that there are two ways by which an investor can invest in mutual funds – one being lump sum investment and the other being the systematic investment plan (SIP).

Ideally, it is always a good idea for an investor to take the SIP route when the market is low. This is because an SIP mutual fund allows you to invest a small amount regularly over a long period. So when you are investing your money for a longer term in small amounts, the market fall would look like a small blip when you look back. An SIP model allows investors to purchase more units when the market falls and fewer units when the market rises. Thus, this averages out the purchase cost of your mutual fund. Also, on taking the SIP route, an investor does not need to time the market as irrespective of the market condition, he will benefit both from the ups and downs of the market.

If investing through SIP, an investor does not really have to worry about the NAV as its volatility will average in the long term, giving him good returns.

Invest through variable SIP A traditional SIP does not allow an investor to invest more when the market is low. But a variable SIP plan does. When markets are trading low, a variable SIP plan allows an investor to alter his SIP instalments to get better returns in the future. For instance, you can make use of InvestOnline.in’s variable SIP calculator by a pre-setting periodical increase in SIP amount in % terms to inculcate discipline in higher sip exposure.

Don’t stop the SIPs When the markets are down, investors usually end up making the wrong choice and end up stopping the SIPs. It is important for investors to understand that investing a small amount regularly over a long period is the best way to maximize wealth.

Don’t invest in any fund Any wrong investment made when the market is down can lead to hefty losses in the future. So, even if you are getting a fund with more units at a lower NAV, it is necessary that you analyze the fund performance and then make an investment. Don’t invest in any random fund as it can cause a heavy damage to your investment portfolio.

Invest for long term In simple terms, it is always a good idea to invest in mutual funds for a long term as short-term investments are too risky. Ideally, to get better returns out of the mutual fund investments, an investor should at least invest for a good 3-4 years.

Thus, in a situation where most of the investors are panicking, you can act smart by opting for long-term portfolios by the way of SIPs or variable SIPs to benefit from the downfall.

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MF Tips For Senior Citizens

https://www.btvi.in/videos/mf-tips-for-senior-citizens/29550

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Is it time for you to shift from active funds to passive funds?

These days, investors in equity markets are having a rollercoaster ride. S&P BSE Sensex and NSE Nifty have dropped by over 20 percent from highs after news on loan default by Infrastructure Leasing & Financial Services (IL&FS), coupled with  rising crude oil prices and depreciating rupee against dollar. As per the current scenario of the bearish market, passive funds are snatching the limelight from active funds.

Active funds are those funds which are maintained to outperform the market, to give their investors returns better than the market, but these funds do not promise or guarantee the continued and regular out-performance. On other hand, passive funds are those funds which eventually invest in the index stocks in the same ratio as the stocks have weighed in the index, which means that these stocks are maintained to give the market return and no better or below than that.

Whenever the market turned bearish, the probability of the index performing well then the stock picking active funds is higher. Abhinav Angirish, Founder, Investonline.in, said: "In the current scenario, when the market is bleeding, the passive funds are good to invest in as the active stock picking funds are underperforming." Financial experts advises investors to effectively allocate their investments to active as well as passive funds, but when the disruption takes over, it is better to increase the investment allocation to passive funds from active funds.

In the current scenario, Angirish said investors should allocate 45-60% of their total portfolio to passive funds on higher volatility.

invest?

Passive funds could either be Index Funds or Exchange Traded Funds (ETFs). "This funds mirror a particular index, thus it becomes an easy choice for novice investors who do not have the understanding or wherewithal to pick actively managed funds," said Kaustubh Belapurkar, Director – Manager Research, Morningstar.

So, these funds are ideal for first-time investors who would like to take equity exposure.

"New investors should start investment in index funds like Sensex or Nifty and think passively. It would take time, but sooner, or later, it will reap great benefits for the investors," Rachit Chawla, Founder and CEO, Finway,

For instance, if the GDP is growing at 7% and inflation is at 6%, then the index should ideally grow at 13% in the long run which is a great return for investors.

"Passive funds should be included as a part of your portfolio construct, based on your risk appetite and other factors. The choice of opting for passive over actively managed funds is purely at a portfolio level and should not be based on market movements," said Santosh Joseph, Founder & Managing Partner, Germinate Wealth Solutions LLP.

Increasing inflows to passive funds

In developed countries like the US, in India too most active managers in active funds fail to beat the benchmark and thus over the last few years passive funds have been witnessing increased flows as compared to actively managed funds. Belapurkar said, “Once the assets under management (AUM) of the Indian fund industry grow multifold, the alpha will start shrinking and thus we will see a migration towards funds. But that is still some time away.”

The Indian ETF markets have crossed the $12 billion mark and the space has witnessed a steady growth. Koel Ghosh, Business- Head, South Asia, S&P Dow Jones Indices & Asia Index said, “The boost provided by the Government via EPFO investing in ETFs and Bharat 22 ETF have supported the passive funds. Not only did the first tranche of the Bharat 22 ETF received a strong response but the second follow on offer was also well subscribed. The passive space is not only growing in terms of assets but variety as well.”

Expense ratio

Active funds have higher expense ratios which means they charge a higher amount to maintain the portfolio. Whereas, passive funds have lower expense ratio in comparison to active funds. Studies show that active funds are no better than the passive funds in the long term and there is only one difference between both of them that active fund drained more money from the investor by giving no better than the average market returns.

Investing in passive funds can save the investor about 1.5%, which is the lower expense ratio in passive funds than active funds, and when these savings compounded it saves a lot more.

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Five reasons you should start planning for retirement early

Failing to plan is planning to fail—I am sure you must have heard that. But let me rephrase this old saying—Start your planning early and, you will end up reaching your goals early.

Warren Buffett had started investing at age of 11, Ray Dalio started the same thing at age 12, Richard Branson started a student magazine when he was 15, so the cues from these examples lead us to the thought that there is more probability of making a fortune when started early in life.

The same applies to the investment planning, whether you are an employee, a businessman, a professional or the other, your retirement is inevitable. It tends to happen sooner or later, so why not plan for it from now?

Planning for your retirement at an early age will give you peace of mind and more corpus to do whatever you want. You may retire early than you thought. These are possible if you set a financial goal, a purpose and start making investments at an early age.

There are so many benefits of starting early in retirement planning, a few are elaborated here:

The Power of Compounding

Albert Einstein said, “Compound interest is the eighth wonder of the world, he who understands it, earns it, he who doesn’t, pays it.” The effect of which can be seen in investing. Your investment reaches higher and higher as long as you stay invested.

Take an example of Mr A and Mr B, Mr A started SIP of Rs 20,000 per month at the age of 25 whereas Mr B started with the same amount at the age of 30. Taking the retirement age at 60 and the interest rate at 15 percent per year and have a look at their corpus after retirement.

Mr A has invested just 14.3 percent more than Mr B during the headstart of five years, but at the age of 60, he gets Rs 30.5 crore, more than double of Mr B who gets Rs 14.3 crore. So start early, and retire with more money in your pocket.

More tax benefits

Taxation cut your income, but investments help you lower your tax burden and save more for your future. Starting your retirement planning an early stage will not only help you with big corpus at the time of your retirement but also helps to lower your tax amount when you invest in the tax-deductible scheme.

One can make aggressive investments

Risks and rewards go hand in hand, you can take more risk at your early age as you have limited financial obligations. One who starts planning and investing early for the retirement can invest in a more aggressive scheme where rewards could be greater.

As you start investing early, say at age 25, mid and small cap mutual funds are better to invest in, which gives you more over the period of time, but as the times passes it is advised to stay defensive and invest in large caps and debt funds where the returns may be low but are safer in comparison.

Start early and enjoy peace of mind

Planning is all about ensuring peace of mind through better execution. The same works in retirement planning also. Starting to invest for retirement at an early age will save one from the last minute rush and making wrong bets, whereas it helps one to separate its financial obligation and investments to reach its ultimate corpus goal.

Planning at an early stage ensure that you are on a right path to make your retirement happier and stronger in monetary terms. The early stage planning makes sure that you are ready for the inevitable retirement and puts you at ease.

You could retire early

When one is done with financial liabilities and saved enough for the remaining life then it is the right time to retire. Early age planning and its best execution may help you to retire earlier than you thought as you have conserved the resource for rest of the life.

If one wants to have a hassle-free retirement where he has the financial freedom then it's better to start the planning as early as he can. If one wants fruits in future, it is better to seed the plant now. Being late does not help.

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Why you must prepare for your retirement now

You hate it or you like it but retirement is not optional. You may choose not to study engineering, you may choose not to go on a particular vacation, you may also avoid going to a relative’s wedding, but you cannot avoid retirement. Keeping aside rare exceptions, almost all of us retire at some point in time if we live long enough. Here are some reasons why your retirement planning must begin now.

Inflation

After you know that retirement is inevitable if you live long enough, you should be worried about the next almost inevitable thing in countries like India – inflation. Most financial planners presume that the prices will go up by 6% each year over long-term. In other words, if your monthly household expenditure is Rs 50,000 today, you will need Rs 2.87 lakh to enjoy the same lifestyle after 30 years.

Everything you want to do when you retire will be priced accordingly. Healthcare costs will be priced even steeper. “Life expectancy of human beings has gone up and it is expected to improve. That means longer retired life for each one of us and it translates into larger retirement corpus required,” points out Tanwir Alam, founder and CEO of Fincart.com. To ensure that you will get what you aspire for, you should start funding it now.

Earlier you prepare easier it is for you

“If you decide to keep aside money for your golden years, you should be befriending magic of compounding. If you start early it will work in your favour,” says Abhinav Angirish, founder and MD of investonline.in. For example, if you start investing Rs 10,000 per month at the age of 25 at the rate of 12% per year, you will accumulate Rs 6.43 crore when you turn 60.

If you start investing at the age of 30 you will accumulate Rs 3.49 crore. And if you start investing at the age of 35 you will accumulate Rs 1.87 crore. “Retirement is a far off financial goal and hence most of us tend to procrastinate. It does not help,” says Tanwir Alam.

Tax-benefits

If you frown at the amount of income tax you pay to the government, you should all the more considering saving for retirement. Retirement saving options such as employee provident fund, public provident fund offer tax-breaks under section 80C of the Income Tax Act for investments amounting to Rs 1.5 lakh in a financial year. Contribution to national pension scheme up to Rs 50,000 also enjoys tax break in excess of extant limit prescribed under Section 80C.

While investing in equities if you opt for tax saving mutual funds (equity linked saving schemes), you enjoy tax break and also see growth over long-term.

It serves two goals – it cuts the tax outgo and it also saves for your retirement.

Insurance

It is available easily when you do not want it at all. You need health insurance when you age. But that is the time insurance companies turn wary of giving you high cover. They bring in lot of conditions such as internal limits, deductibles and co-pay term. That restricts the quantity and quality of cover you should be getting.

If you want to avoid such a scenario, buy a cover early in your life. “When you are young you get insurance cover very easily and at a low cost. You can accumulate no claim bonus over the years. You also can steadily increase the sum assured at regular intervals which works in your favour,” says Abhinav Angirish.

The same applies to critical illness covers. Buy it now so that it works for you when you are in need.

Self-respect

If all these reasons do not make you consider starting your retirement planning, this could be the last reason. You do get a loan to buy a house, buy a car, buy any asset, to fund your education, to fund your marriage, but no bank lends you money to live through your retired years.

“As nuclear family becomes the norm, it is more likely that one’s kids won’t stay with him. Even if one’s kids stay with him, it is not a great idea to ask money from kids when one retires,” says Tanwir Alam. He adds, “Generally, one commands respect from his kids and grandkids if he has the ability to give even after he retires.”

If you think you should start working on your retirement plan now, here are seven factors that you should be aware of.

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Choose your mobile app wisely to invest in direct mutual funds

There are several mobile apps available on the tip of your fingers to install and start investing in direct mutual fund schemes. The biggest advantage of using mobile app for buying and selling mutual funds is the convenience and ease of transaction. Some of these apps, such as Paytm Money, Groww, Coin, Piggy, Sqrrl, etc, are offering direct mutual fund plans to invest and hence, saving on expense costs incurred by the investor.

 Savings: Direct Vs Regular mutual fund plans

Siddhartha Rastogi, Director of Ambit Asset Management said, “Every penny saved in the transaction process and fund expenses is indirectly viewed as penny earned. From a long-term perspective of 10 to 15 years, these savings in expense compound to a substantial 13-15% incremental returns.”

For instance, you now invested Rs 5 lakhs in direct mutual fund scheme and assume 15% compounded returns over the next 15 years. You will get a corpus of Rs 60.75 lakhs assuming an expense ratio of 1.7% in direct plan, as against Rs 52.72 lakhs from a regular mutual fund plan with an expense ratio of 2.5%. Here, the difference of investing in direct and regular mutual fund plan will be Rs 8.02 lakhs which will be huge savings for an investor in the long term.

 How to start investments in direct plans using mobile apps?

The process to start investing in direct mutual fund plans using mobile apps has become very simple. It requires no physical documents to be sent over.

Samant Sikka, Co-Founder Sqrrl – Investment & Savings App said, “Once the user completes the initial sign-up process using their mobile number, name & email address, they are free to explore the app and set up their investments. To start their investments, they need to complete their KYC verification process.”

He further explained, this can be done via Aadhaar or PAN card. The KYC verification process is entirely paperless, and requires users to enter their PAN number so that the app can check whether they are already KYC verified or not. If they are, no further action is required and the user can proceed to set up their bank account and start investment.

However, if the user’s PAN card is not KYC verified, they are required to complete the verification using their Aadhaar number. This is called the eKYC process and again, it requires no physical documents. Verification is done using Aadhaar-based OTP verification.

Novice investor: Watch out your investment behaviour

Investing through mobile apps in direct mutual funds is targeted at masses. Rastogi said, “Novice investors don't understand the risks associated with investments, irrespective of the asset class. For example, most people believe that mutual funds are completely safe and give guaranteed returns like fixed deposits.”

This investors fail to understand the risks associated while investing in mutual fund schemes. So, when novice investors experience losses in the mutual fund portfolio, they will not consult any financial advisor and decide to exit at the lowest point of the investment holding cycle.

Rastogi added, “It’s important to note most of these mobile apps and inflows of money into direct mutual funds have come into existence in last 12-15 months. Both, debt and equity markets have not seen major downturn post Jan 2017; hence, these apps will only prove to be viable if financial crisis like 2008 occurs and investor still continue to invest and retain their investments through these mobile apps.”

Investors should consult with their financial advisors prior to investing through direct plans using mobile apps. It is important to understand the pros and drawbacks of the investments.

Pros

Faisal Rahman, Product Head, Coin, Zerodha said, “Mobile apps have made investing in direct plans a whole lot easier. It not only offers the convenience of investing on the go, but also the ability to track and manage the portfolio. This along with the fact that people can start investing in under 10 minutes if they are already KYC verified.”

Abhinav Angirish, Founder, investonline.in added, “Mobile app users now have a wide range of mutual fund schemes to select from as per their own requirement and goals. It also helps investors in smaller cities to divert their savings from cash or savings account to direct mutual fund plans.”

Drawbacks

Angirish pointed out, “Investors could get biased advice from mutual fund apps. They are more exposed to the mutual fund schemes which app owners are advertising/promoting through recommended portfolio or as top funds. Further, mobile app investment services would be more generalised. Customer-based or customised services will not be there to better serve the users.”

Investors don’t get timely advice on investing in mutual fund schemes and they lack quality research by using mobile apps platform. Also, most apps don’t offer assessment to risk profiling for novice investors which helps them to select the mutual fund scheme as per risk appetite.

Some of the mobile apps are showing returns of mutual fund schemes as per their convenience i.e. only 1 year or 3 years despite scheme is existing for more than 5 years. Further, some of the apps are showing only 1 year performance while comparing with peers which represents incorrect image of the scheme against peers before investing.

There are mobile apps which are recommending best funds based on only last 1 year performances and information on risk ratios is not provided in the app for investors to analyse.

Some of this mobile apps are not updated on regular basis. There are errors in the stocks portfolio of several schemes as well as it still shows name of an old fund manager in schemes despite his exit from AMC few months back.

How this mobile apps are planning to monetise from investors?

Investment in direct mutual funds through this mobile apps is marketed as free for investors. But, there is an interest to earn from this investors in other ways by bringing them on their platform. So, be cautious while selecting any mobile app to invest.

Rastogi said, “The personal information can be used to solicit and cross-sell other products that entail good commissions for the platform such as for selling insurance schemes, offer loans or credit cards, etc.”