On 21 September, it was the first time in this round of correction that the S&P BSE Sensex, the equity market barometer, fell around 1,000 points during intraday trading hours. For young equity investors, this was also a day of much unrest as news of market crash made headlines that couldn’t be ignored. Khyati Mashru, founder and chief financial coach, Plantrich Consultancy LLP, got on at least eight calls with her relatively new equity investing clients to reassure them about the long term phenomena.
Don’t get jittery due to market volatility, stay with your SIPs
Since then, volatility in daily equity returns has doubled in October as compared to the previous nine months of the calendar year 2018. The trigger visibly has been a convergence of factors including high crude oil prices, sharp fall in Indian rupee value and an overall rise in global capital market risk.
The near-term uncertainty and inability to predict market behaviour is the primary reason why retail investors need to stay firmly grounded in their behaviour towards regular investments in equity.
Undoubtedly, it is uncomfortable to continue putting in money every month if you keep seeing a negative return. But historical trends show that over long periods, volatility smooths out and your expectation of inflation beating return from your equity fund gets fulfilled by relentlessly sticking to your systematic investment plan (SIP).
A long investment horizon reduces volatility
To see whether SIPs work in the long run, we took the ten largest equity diversified schemes (roughly 35% of the assets of the total pool of diversified equity funds including mid-cap schemes) and checked their ten-year and five-year SIP returns on random dates chosen for each year from 2008 till 2018. A long time like this covers many market cycles—namely the crisis in 2000, 2008 and 2013.
In the ten-year return data, we found that barring three periods of above average return, namely 2008, 2010 and 2011, all other periods showed investors earned a minimum of 14-18% for bulk of the large- and multi-cap schemes and around 21-23% for the single mid-cap scheme in the selection.
A 14-18% annualised return over a period of 10 years, regardless of which year, month or scheme (among the selected 10) you invest in, is very attractive compared to volatility experienced in a single year.
According to long time fee-based financial planner and advisor, Suresh Sadagopan, founder Ladder7 Financial Advisories, “For long term returns from equity, we build in an expectation of 12% and 7% for fixed income.”
Now when you consider the five-year return data again taken on a random date and month each year from 2008-2018, the fluctuations are much higher. The highest return was around 54% by one scheme in January 2008; makes sense logically as that was a market peak and the previous 5 years had seen a relentless rally. The lowest return was around 2% by the same scheme in February 2009.
Low five-year returns were revisited again in 2012 when most of the funds under consideration delivered single digit returns. Visually when you see the data, it is easy to conclude that the certainty of a stable range of returns, no matter which fund you choose or when you start or end an SIP, increases manifold if you extend the time you remain invested to 10 years.
Statistically, too, the measure of volatility, i.e., the standard deviation of returns doubles in a five-year period as compared to a 10-year period; but staying the course despite volatility aids more than it hurts your long-term return.
“It is the volatility in equity markets that helps build long-term returns. If markets move only upwards, all SIP instalments would happen at higher level. Corrections give us the ability to take advantage of lower prices. If we remain invested patiently, the expected long-term returns can be met easily,” said Mashru. To address investor concerns, she takes them back to the difficult time in 2008 and reminds them about their goals in future.
Behaviour matters more than returns
For investors, returns should not matter, rather it’s the financial goal linked to the return which is of consequence. The purpose of any kind of investment is some future financial goal, be it about buying a house or retirement. If you have a goal and a prescribed investment path through a mix of products, you must remain on that path to be able to achieve it. Stopping SIPs in a market meltdown is akin to whirring off the chosen path and it is the precise behaviour you want to avoid. It can potentially leave you less equipped to achieve your financial goal.
“When a situation like this happens, we coach clients on the emotional front. Investors who have recently started in equities are the ones who are most concerned; those who have been investing for a few years understand this interim volatility better,” said Mashru. Sadagopan agrees. “In times like these, focus on behaviour is primary. We discourage investors from thinking about stopping SIPs or changing course; continuing investments as planned towards their goals is the only solution no matter what the market is doing.”
There is historical data to corroborates the efficacy of staying with your SIP . While advisors caution over reliance on past performance, there is merit in analysing returns of a basket of schemes as a collective to understand the trend they follow. Despite the type of scheme, so far, all the evidence points towards a smoother return journey when you remain invested and continue your SIPs over long periods of time.