SIPs Don’t Guarantee Anything

 Equity can also underperform other asset classes in the long term, depending on your time of entry and exit.

Equity cult members believe that equity will provide ‘fabulous’ returns if you avoid timing and invest regularly through systematic investment plans (SIPs). But, if we analyse what the Sensex returns would have been after doing monthly SIPs on the Sensex for 10 years, this is not the case.

The  chart to the left is annualised returns (CAGR) on 10-yr SIPs on the Sensex. For example, the first data point of 34.55% on 31-8-1994 means the CAGR of 10-yr SIPs (i.e. SIPs from 1984-94) and the last data point of 13.37% on 31-8-2014 means the CAGR of SIPs from 2004-14.Dividend yield on the Sensex is ignored because retail investors will be buying Sensex using index funds and the small dividend yield will be negated by the expense ratio charged by these funds.

As seen from this graph, there are times in the past 20 years (i.e. mostly between the bear markets of 2001 and 2003) when equity investors have actually lost money even after doing SIP on the Sensex for full 10 years.

This is not to say that equity is a bad asset class or SIPs are not beneficial but that SIPs only reduce volatility and no in way guarantee fabulous returns from equities in the long term.

Also see in how many years equities have not been able to give 10yr CAGRs of 10%.So now you know what to do when banks have FDs offering 10% or more over 10years.Same goes for bonds, especially of the quasi government variety.