Last week, I woke up to an unexpectedly gratifying news alert related to the Indian Mutual fund industry. Various news articles celebrated the fact that the monthly SIP (systematic investment plans) contributions of Indian mutual fund industry have crossed 20k crore for the first time ever in April of this year. I had to
re-read and even pinch myself to fully grasp the magnitude of these SIP inflows into the market. If someone had challenged me a few years ago to bet on the possibility of such high monthly SIP inflows, I would have wagered everything, only to lose badly with this latest development!

While such a high SIP book in the industry gives lots of assurance and hope regarding the depth of participation from Indian investors, it’s also a moment to reflect on the type of expectations we should have regarding future returns, especially, as human beings we are all prone to recency bias! So, I decided to test the evidence with some past data. Before we get to the numbers, let’s look at some of the investor profiles who contribute such an incredible sum of money on monthly SIPs.

If you happen to be one among the 5 profiles mentioned above, I welcome you to continue reading and see if your thoughts resonate with what I have to say!
Now, let’s get into the nitty-gritty with some hard numbers!

The previous instance of a multi-year bull run for Indian equities were between 2004 till the early part of 2008, where a confluence of structural factors propelled returns for investors. Subsequently, the next decade and a half was a roller coaster, and it appears we are back again to the heady days of 2004 to 2008. It’s a no brainer that a booming market will attract a lot of flows into the markets, and the flip side is that we cannot always assume the investors will get the best value for the money that is invested. So, a familiar approach is to stagger the investments through Systematic Investment Plans with the hope of averaging the cost of investments. Would such a strategy be helpful for all types of investors mentioned above? As we move our investments in autopilot, it’s essential to pay attention to the signals!

As can be seen above, the first block of 5 years and in some cases even 10 years, the returns are not consistently in the double digits. While the SIP started after 2016 has been rewarding over a 5-year tenure, we can conclude that much of these returns are attributed to the easy money chasing the markets in an ultra-low interest rate environment. A more sensible approach will be look at the experience of those SIP investors, having started in 2006 and 2007 when the previous bull market was maturing, and a similar investor participation reckoned in the equities. For instance, a SIP in NIFTY 50 started in December 2006 would have fetched less than 6% annualized returns after a 5-year period and not even a double digit returns even after holding for a 10-year tenure. With the passage of time the returns indeed had become respectable over a 15 year and a 20-year period. But the point to ponder here is how many investors, having started their SIP at relatively higher levels in December 2006 would have stayed the course?

Be that as it may, let us delve into the specific investor profiles as indicated in the beginning of this note.

For the first two profiles – the affluent and the systematic wealth accumulators, the strategy may be simple. Hang on with the investments by being a little realistic about the return expectations. You may have time at your side to reach your financial goals.

For the third investor profile – the investors with financial challenges – They will be better off not to fall for the lure of easy returns. It is extremely critical to resist the temptation of investing borrowed funds. If the corpus is good enough to retire some of your existing debt, please think about a plan to utilize the corpus and pay off the debt. Afterall, who would like to bear the high cost of a personal loan or a credit card debt! Here I am forced to contend with late Adam smith – “What can be added more to the wealth of a man having good health, a clear conscience and is free of debts!”

The fourth profile of goal focused investors may be running the last lap. Here the skills of a marathon runner must differentiate them from a sprinter. Since your goals are nearing, be it your child’s education or constructing that dream home – it would be worthwhile to move to liquid assets or a more conservative investment choice. If you plan to take a home loan for your dream home, consider using a part of the corpus as your own contribution.

Coming to the New age wealth accumulators – they are the ones blessed with beginner’s luck. These cohorts may also follow the investor profiles 1 & 2, that is being realistic about the expectations and being mindful of staying the course should the markets turn choppy! Wealth creation is a long process, and it takes time to reach the financial goals!

It is indeed a remarkable milestone scaled by Indian mutual fund industry. Such a high scale participation offered by the domestic investors through systematic investments further reinforces the coming of age of Indian equity investing culture. As we revel in this equity party, let’s be a little mindful of future expectations.

Happy Investing!

Disclaimer: 

Mutual fund investments are subject to market risks. Past performance is not an indicator of future returns. Equity market investments do not guarantee a fixed return. 

The above note is prepared for the purpose of information sharing with the investors of Figital Technologies Pvt. Ltd. The data points are compiled from multiple sources with the objective of enabling the investors to take an informed decision regarding their investments. The views and commentaries expressed in the above note may or may not result in actual outcomes. While much care has been taken to present accurate and relevant information, Figital Technologies Pvt. Ltd or its partners cannot be held responsible for the authenticity of data. Investors are advised to reach out to us if they require additional input before taking an investment decision considering their risk appetite, Investment goals and time horizon. Neither Figital Technologies Pvt. Ltd nor its affiliates/partners shall be liable for any damages whether direct or indirect, incidental, or consequential including lost profits or lost opportunities that may arise from or in connection with the use of the information.