The Mutual Fund Show: Continue, Pause Or Stop SIPs – What Should Investors Do?
Most financial planners say any time is good to start an investment. But given the volatility in market, what should investors do?
Retail participation in equity markets through systematic investment plans—considered one of the best ways to invest in mutual funds—has increased over the past couple of years. But when it is a good time to start or stop an SIP?
Most financial planners say any time is good to start an investment. But given the volatility in the market over the last year and a half, what should investors do?
“One of the worst ways to look at investing is to look at immediate past returns. If immediate past returns are bad, then one looks at avoiding that asset category and vice versa,” said Vijai Mantri, chief investment strategist, founder promoter and chief mentor at JRL Money. “However, according to the theory of mean reversion, anything which goes down will ultimately go up. That’s where SIP comes in because historically it has been found that your returns from SIPs are far higher when the markets go down,” he said on BloombergQuint’s The Mutual Fund Show.
Mantri explained this through an illustration.
Assume the Midcap100 Index would fall 2.5 percent each month for the next two years starting August and then gain 2 percent each month thereafter. In this case, how would investments perform?
While the index would have declined 45.5 percent in the two-year period, Mantri said SIP returns would have dropped only 25 percent. And when the index returned to its current levels, the returns on investment would have been close to 38 percent.
Watch the full show here to know about how to go about SIPs…
Here are the edited excerpts from the interview...
Compare this to a past instance and tell us why is it a good idea to continue a systematic investment plan?
The most important thing is to look at the data. What happened in the past and what is going to happen in the future. And I believe they are two very important laws in finance. One, is reversal to mean. Anything which has gone up, will come down and anything which is going down will ultimately come up.
Second part is, one of the worst ways to look at investing is to look at immediate past returns. If immediate past returns are good, then one is tempted to look at investing in that asset category. If immediate past returns are bad, then one looks at avoiding that asset category. One simple illustration to look at is G-Sec (government securities) returns right now. Most G-Sec funds are in double-digit. It is one of the best performing asset categories in the last one year. But one year back, all G-Sec funds were in a negative territory. If anybody told you one or one and half year back that please look at investing in the G-Sec fund or look at long-term debt fund, nobody would have believed it. Few years back, we said, suppose we have EMI and SIP and suppose you set a target for SIP, and whenever the target hits, you take money out of SIP and invest that money to repay your housing loan. We got trolled on social media. People said it doesn’t make any sense, one should stay invested in SIP. If anybody would’ve listened to that and acted, he would have been much happier today.
One needs to examine data. In 2008, the market— Nifty, touched 6,000 and then it fell to less than 3,000 in October 2008, rose again and fell again in March 2009. If you look at data of these 15-16 months, it will give you very interesting inputs. If you look at January 2008, Nifty was at 6,000 plus number and suppose someone started an SIP at the peak of Nifty in January 2008. By October 2008, Nifty is almost down 50 percent from its peak. Your investment is showing 32 percent negative returns at that moment. We haven’t seen that kind of negative returns yet on SIP. But suppose you stayed invested. The numbers look much worse in January 2009, where the Nifty has touched 2,683 and your SIP returns are negative 37 percent. But look at the numbers of April 2009, Nifty is almost at the same number and perhaps lower than October 2008 number but the negative returns have come down from 37 percent to 31 percent; and in May 2009, Nifty has gone up to 3,654, your negative returns are just 3 percent; and in June 2009, that is after 18 months you started your SIP, Nifty is around one-third down from its peak—down more than 30 percent but your SIP return is up 19 percent. This is what happened in 2008 where the market has gone through deep and immediate correction and bounced back, not bounced back fully but it covered half of its losses. But SIP actually started delivering a positive return. This is what we witnessed in 2008.
The numbers may vary Vijay, but other examples as well if you look at an SIP, which someone had done maybe in 2001 or in 2007 or in 2008 or in 2013, the numbers may not look similar, but they may rhyme.
The numbers look almost identical. If you look at the year 2000, instead of 18 months, sometimes it is 22 months, sometimes it is 24 months.
But one thing comes out very clearly that the deeper is the correction, the longer the market remains in downward journey, better is the return in SIP.
Now, this is very easy for me to communicate because I am seeing the market from 1992. I have seen 1992 to 2004, 12 years, absolutely no returns in the market. I have seen year 2000, I have seen year 2008, I have seen 2013 but it is not very easy for new investors where large chunk of money has come in the mutual fund industry post 2016.
If you look at 2004 to 2014, in a 10-year period, on an average, per day basis, mutual fund industry got Rs 35 crore inflow. Post 2014, the per day inflow is Rs 400 crore. It is almost 11-12 times more in last five-six years and I don’t think many of these investors have witnessed these kind of challenges and now on the top we have direct plan as well where investor might have gone directly and now they are struggling. I am not saying that one should not go for a direct plan, that is not the intention, I am making a general statement. The second thing to keep in mind is when you look at returns from SIP or equity market, it comes through the phase of volatility. Now what drives your investor behavior, when you look at the numbers, which part of your body tells you that the returns are negative? It is your eyes and your brains that tells you that the returns are negative. But in the equity market, one should not listen to brain too much. It is your stomach that drives your investment outlook. So, I’ll make an analogy, what drives food habits? It is not your liver; it is not your intestine. What drives food habits is your tongue. When you are driven by your tongue, you would eat something which you should not be eating.
Let’s put some numbers from the current scenario. What could happen if the index were to gain XYZ and therefore what could happen to SIP investments if there is a calculation to do that?
We should look at, on index, we have not seen that kind of correction. The top line index is just down 9 percent. That is not where the customer’s pain is. The customer’s pain is more in the mid cap and the small cap.
The right thing to look at is mid-cap indices. See what happened to the mid-cap indices from the peak of January 2018. Last peak was in January 2008 and then the peak was in January 2018. If you look at data from January 2018 to August 2019, we have almost like 17-month period. The Nifty Midcap indices are down 26-27 percent from its peak. The SIP returns are not down as much. It is 13.5 percent as on date. That is the SIP number for mid- and small-cap fund.
Now let’s see what happened from today, let’s try to peep into the future and let’s assume that the market continues to have the same slide. Markets continue to go down from here to next two years. Let’s assume that the market is going to go down 2.5 percent from this level. We’ll take a projection from August 2019 to August 2021. For a 24-month period from this level, the Nifty mid-cap indices continue to go down 2.5 percent on an average. In August 2000, your SIP returns are negative 13 percent. By August 2020, the returns are negative 28 percent. That is just one year from now. Now, assume one more year from this level and look at the data on August 2021. If you project for next two years and you continue in your SIP, your 4,40,000, which you invested, is showing a value of 2,76,000. So, your portfolio is down around 38 percent but the broad Nifty indices is at around 50 percent plus. That is the kind of volatility you would see in your portfolio suppose you see the market continues to go down. We assume the market continues to go down 2.5 percent per annum. This is what we are saying will happen and potentially can happen to the customer’s portfolio. But the market, if it goes down, it has come down from the peak of 21,000 in Nifty to around 15,000 levels, around 26-27-28 percent downward. And from here if you look for next two years, again, we are seeing a drop of 2.5 percent per annum. Now assume that it then starts going up 2 percent per annum from the bottom level. What you will see in the next one year plus—the return, which was 37 percent negative, by November 2022, your number has become only 8 percent negative. We haven’t reached the level where we started not even the midway but your SIP’s negative returns start dropping by November 2022. But suppose, you go further and look at May 2023, your SIP is in positive territory and by February 2024, your SIP is showing you 22 percent internal rate of return where the index is still at much lower level from where we started.
But almost at the same level right, 15,755. By August 2019— in and around those levels.
No, we started at 21,000 level, mid-cap goes 15,000 level, it corrects 2.5 percent per annum, then again it rises by 2 percent per annum, it comes back to 15,000 level, the starting point has been 21,000, still it is 15,000 level. It is almost 20 percent plus down but SIP is showing 22 percent positive return. That is the beauty of SIP.
A lot of people would argue that why is that the index would rise 2 percent or fall 2.5 percent. Historically, there have been some instances wherein the extent of that correction would have been that much, which is why these are safe assumptions to make. For hypothesis, this is not what will happen but assuming that it happens, these are not unrealistic assumptions.
The market from the peak if you look at Nifty, it has gone down around 58 percent, the mid- and small-cap indices have seen a much deeper correction—they have gone down about 60 percent plus. We have taken those numbers. Even if it goes down further by a few more percentage points, it doesn’t matter because from 60 percent down to 65 percent down, it can happen. But the deeper it goes, the faster is the recovery and more money is actually made. You can only make money in SIP if the market goes down much deeper. The market just can’t go in an upward trajectory. Let the market keep going down, this is what we’ve seen happen. It may not go down by exactly 2.5 percent per month, some months it may rise, some months we may see more deeper correction. Let’s assume that it falls as it has fallen historically, and it has taken much longer than what we have seen in the past. Even in that situation, even the market does not come down to the 21,000 level, your SIP is in positive.
Right now, we have spoken about just coming back to 15,000 and not the 2 percent level. What if it were to go to historic peaks?
If the market comes back to 21,000, the way it has fallen to 2.5 percent per month from now and again rise 2 percent, your internal rate of return on SIP is 12 percent per annum. At 21,000 you started, mid-cap indices have gown down below 10,000, rose again to 15,000, you’re making 22 percent absolute return, comes back to 21,000. The starting point and the end point are the same but because of this kind of a journey, your SIP is showing 12 percent XIRR (extended internal rate of return).
I want to start investing but the markets may continue go down or go up like that, what happens to my returns if I am starting my SIP today? As of this moment? Any math for that?
If you haven’t done SIP now, I think you should do it now. Let’s assume we take Nifty midcap right now. Nifty Midcap is at 15,000 level. Again, if we take the same number, it is going down 2.5 percent per annum.
For two years?
For two years. Like the same number. Your starting point is not 21,000 Nifty, your starting point is 15,000 Nifty level. It goes down for the next 2.5 percent per annum. It comes back again and suppose it hit just 15,000 level, not even 21,000, your XIRR on SIP is 14 percent per annum.
In which case it almost seems to be a scenario that you are painting that if you are an Indian SIP investor may be you should be happy that market just are giving you a longer lull, either a longer lull or going down over a period of time because it allows you to buy those units at cheaper price, everybody knows that math but nobody would figure out this is the extend of gains that can come in.
The reason is very simple. If you look at the mathematics and how it works. In one of your programmes, I took illustration of gold; what people end up buying is fixed quantity but what if you buy fix price.
Let me give you some numbers. You bought 10 grams of gold on every Dhanteras for 20 years. So, you bought 200 grams of gold. The average price of buying 10 grams every year from Rs 4,000/10 grams to Rs 32,000-33,000, at that time was around Rs 16,000 per 10 grams—that is average cost. Now suppose, instead of buying fixed quantity you said I will buy fixed price. You said, I will buy Rs 16,000 per month gold, then the average cost comes down dramatically instead of 200 grams you end up buying 320 grams and the logic is very simple. When you buy a fixed quantity, when the prices are Rs 4,000 for 10 grams, you are investing only Rs 4,000. When the prices are Rs 32,000 for 10 grams, you are investing Rs 32,000. But when you buy a fixed amount—suppose at Rs 16,000 you are investing when the prices are Rs 4,000 you are buying 40 grams. When the prices are Rs 32,000 you are just buying five grams. That is the magic which works in SIP. In SIP, if you buy through fixed amount, the average cost of that will be much lower than buying fixed quantity. If the market remains at the same level, it comes back to the same level, you are in “moneyness”. This is the math many people do not know, many people cannot comprehend, many people have not been explained, but this logic will works wonderfully well in SIP.
There are a couple of new fund offers that are on now. Have you had a chance to look at them? The Motilal Oswal team was talking about launch of some passive funds, any thoughts on that? There is Sundaram NFO just opened, any thoughts on that?
Definitely, we track most NFOs because that is part of our job. Sundaram they already have schemes—some are doing well and some not doing well. In the multi-cap category, there are open-ended funds available in markets. Suppose you want to invest there is better opportunity to invest in those kinds of funds.
On passive investing, the jury is out. I don’t have enough data available to suggest that in the Indian market the passive fund will continue to do well. I do not agree with that and we need to see the data. I have done my own studies and my studies prove that open-ended mutual fund has had significant alpha to the customer. I tell you the challenges with many of these studies. One—if you look at numbers, there are say 40 funds in large-cap category for argument’s sake. Now some guy is following Nifty 50 as benchmark, some guy is following Sensex as a benchmark, some guy is following Nifty 100 or BSE 100 as a benchmark but for the studies of these funds, one benchmark is picked and then the comparison is done with that benchmark. That fund house is not even following that benchmark and some of these benchmarks were not in existence 10 years back. I have seen some studies where the benchmark was not in existence. When I say my benchmark is Sensex or Nifty how would you compare with BSE 100? That’s not possible.
The second point is that the comparison is made with total return index. My question is that which customer get total return index? Because either you invest in ETF or you invest in index fund. In index fund there is impact caused— that is the fund running cost. In ETF, there is a brokerage, there is a buy and sell spread. I don’t think all these things are captured when the comparison is made. If you factor the right thing to do, for instance if you want to do comparison take Nifty mutual funds, take Nifty funds and do comparison of Nifty funds with open-ended mutual fund in large-cap category then the game is there.
You would not be a proponent of the passive funds?
Not yet, if I see data and if I see this trend is emerging very clearly. Today I don’t see that.
The argument is that some of the large-cap funds have not able to beat their benchmarks in the recent past. 50 percent of them have not able to do that. Why invest money in these high-cost funds on the large-cap side, I might invest in passive?
The argument to me looks completely lopsided. Why large cap has not done well? Because the large-cap portfolio will have 40-50 stocks and if you see the current market is driven by the few stocks. So, a mutual fund cannot have 12-15 stocks. The gain in the market has come through these stocks only. At any given point of time, when you see the data, these kind of conclusion may come but let’s see one, one and half year down the line, as before the show you were saying that bottom 30 index of Nifty may outperform top 10. If that trend comes, then definitely we will see outperformance again.