Today, August 20, 2020 is a special day in my life. No, it’s not my birthday or marriage anniversary. Today is the day to celebrate the 10th anniversary of my first SIP investment in life, and it is a proud moment for me. Hence, whatever I am going to share with you over the next 5 mins is all factual that has happened in my portfolio and no fiction (we call it “backtesting” in our industry). Please remember though past performance is no guarantee of future results.
I started my first serious savings of Rs 10,000 SIP on this very date ten years ago. I had randomly chosen the below funds. I am not able to recall why these two funds only, and it doesn’t matter.
DSP Tax Saver Fund – Rs 5,000
DSP Small Cap Fund – Rs 5,000
That time I had no idea or the vision to run these SIPs for ten years and beyond. I couldn’t believe that over ten years I have never missed an instalment and also never changed funds. I simply kept investing bit by bit. Ten years is also a long time to see all cycles of the markets.
Today, I am happy to share my journey over the last ten years in both these funds and the lessons learnt.
Portfolio Value as at Aug 20, 2020
DSP Tax Saver Fund
I chose a tax saver fund as I wanted to save taxes under Sec 80C. Since I had some amount of money going in for my term plans, Rs 60,000 was good enough to cover my Sec 80C requirement. Personally, I have never been a big believer of PPF (Public Provident Fund) and because I have a higher risk-profile, I chose to invest in a tax saving fund also known as ELSS (Equity linked Savings scheme). I am happy to share over ten years the SIP in the DSP Tax-saver fund has delivered a decent 13.27% CAGR (compounded annual growth rate) which is much better than PPF which would have given an average 7.5-8.0% p.a returns during the same period. Of course, PPF is tax-free at maturity while this may be taxed at 10% Long term capital gains, but with such a wide margin still, I will be much better off even after paying taxes at the time of exit. Since PPF is usually for a fixed tenure of 15 years that can be extended further, the real acid test would be to check my SIP results after 15 years and compare with PPF returns. However, I am highly convinced that the gap would be even much higher compared to the present returns. Anyways, I will write another blog post to share the actual results.
The ten year journey has never been smooth though. If you carefully observe the chart below, first four years, I didn’t make any money in my tax saver fund and here I would like to make an interesting point. I have observed with my experience of talking to most investors, 95% of them would have either switched the fund or stopped the SIP or worse even move back to good old PPF. I have also seen many investors keep changing the tax-saving funds year after year and in the process, end up collecting 4-5 tax saver funds. I believe one tax saver fund is good enough in the portfolio, and one should change only if the fund has been a consistent laggard over 3-5 year period. My funds ten-year SIP track record has been decent. It is ranked 5th out of 26 funds i.e. it is in the first quartile, and I would simply attribute this to my good luck. BTW, even the 23rd rank fund which has given a CAGR of around 7.79% return over the last ten years would have outperformed the PPF investme nt (Source: www.valueresearchonline.com)
10 year SIP Chart of DSP Tax Saver Fund – Rs 5,000 per month
DSP Small Cap Fund (Erstwhile DSP Micro-cap Fund)
I have always been a high-risk investor, and hence DSP Small Cap Fund (erstwhile DSP Microcap Fund) was a perfect fit for me. I knew in the very long term small-cap would surely outperform large caps, and I had a lot of patience to ride it out. A similar patter was seen here as well. First four years nothing happened (pls see the chart below), the fund was languishing and then next three years everything happened, and it became the best performing fund in the industry. My 7.5 years SIP return as on Jan 2018 was 35.58% CAGR (can you believe it?) I was foolish not to book profits from the table thinking I don’t need the money so why bother. Let the compounding run. I couldn’t have been dumber.
Portfolio value as at Jan 21, 2018 – Market high
Portfolio value as at Mar 24, 2020 -Market Low
As they say, trees don’t grow to heaven; all good things do come to an end. From the high of Jan 2018 to the lows of March 2020, my 9.5 yrs SIP returns came to as low as 7.15% annualised return due to the Covid induced market fall. Still, I was not bothered, and I continued. Today, it is back to 16% p.a returns. Of course, next time, when small-caps become expensive again, hopefully, I won’t make the same mistake – once bitten, twice shy. All high-risk bets have an expiry date, and one should try to book profits once you have achieved your target return.
Also, volatility (market ups and downs) has never bothered me. I love volatility. One can make outsized returns if the volatility is high. SIP also works wonderfully during volatile times as you systematically keep buying during highs and lows of the markets and getting an average price. High volatility is expected from such risky strategies (pls see the chart below) and if one can play the volatility game well, you will be unstoppable.
10 year SIP Chart of DSP Small Cap Fund – Rs 5,000 per month
So what’re the lessons learnt over the last ten years.
1. The SIP should never stop. i.e. the discipline should never be broken. One may change the fund once in a while not because the fund is underperforming for six quarters but because if the asset class in which you have invested is showing signs of a bubble, it is better to book profits and move to an asset class that is undervalued. Remember, after five years the SIP money accumulated becomes a lump-sum amount, and if the market comes down, your portfolio will take a beating too.
2. Usually, the individual fund performance doesn’t matter much; the asset class does. You may be in the best performing fund of the worst asset class, and you won’t be able to outperform the worst performing fund of the best performing asset class. (its a bit of tongue twister, but you will get it eventually)
3. 90% of investors change or stop SIP in the first 2-3 years because the fund isn’t doing well. If you have selected 3-4 funds for SIPs for the long-term, always remember one fund will be the best, the other will be the worst and two funds in between. Individual funds returns don’t matter; portfolio returns matter. Don’t lose the forest for the trees.
4. One should always increase the SIPs year after year no matter what. It will help you create substantial wealth over many years. I started my family SIP with Rs 10,000 per month, and I am proud to share presently it is at Rs 10,20,000 per month and will continue to go northwards in the years to come. I have seen many people who are happy with their SIP returns somehow continue with the same amount of SIP even after seeing the proof of pudding over 3-5 years. Yes, in the end, you have made 15% CAGR for 20 years. But how much money was going in the SIP? Rs 5,000 per month….Ah…big deal
5. Be unemotionally attached to your SIPs. Don’t see the returns now and then. Investments are like soaps. The more you see, the less you get. Infact, you should be happy if the markets are going down so that your next instalment will buy you more units. Warren Buffet has said ‘If you are going to be a net buyer in the market over the next 5 years, would you want the market to go up or go down?” I think you are smart enough to know the answer.
For mostinvestors the focus is blue line – fall in NAV
For me – it’s green line – More no of units
Same graph. Different perspective
6. What you earn over the first 20 years of SIP, you will make similar kind of corpus in the next 5 years. SIP is a game of discipline and patience – very easy to start but most challenging to continue and keep it going. Not doing anything for long period is not acceptable to most people. Most investors want action in their portfolio….every three months.
7. SIP is not a magic tool that will never give you a loss. Infact, I have a 4.5 year SIP running in the SBI Mid-cap fund that is showing a meagre 2.5% CAGR since inception, and I am not bothered but whenever mid-caps come back in the limelight, all my patience and discipline will be rewarded in a span of 12 months. I don’t know when this will happen but I know for sure it will happen sooner than later. A similar experience happened with me in the Edelweiss Greater China Equity Offshore fund. My five year SIP was showing a return of 2.44% p.a. (Less than savings a/c returns) and one more year of SIP, the 6-year CAGR of the fund rose to 16.73% p.a. I said to myself…OK…Not bad.
8. If you worry about market volatility (which is the main reason for stoppages of 90% SIPs) then SIP in Dynamic Asset Allocation Funds (also know as Balanced Advantage Funds) or Multi-Asset Funds is the best way to build a long term portfolio. In such kind of funds, you don’t need to change the funds based on the valuation of the underlying asset classes as the fund manager does it automatically based on the funds’ strategy and philosophy and you can reasonably expect Fixed Deposit + 2-4% over a 5-7 year period. In this case, you can afford to SIP Karo, Mast Raho.
9. For a youngster, the first long-term SIP to start should usually be a tax-saver fund, if you are not too fixated on PPF and in 9 out of 10 cases SIP in a tax-saving fund will beat PPF hands down. Since it has a compulsory 3 years lock-in, you will have no choice but to remain invested; you would make money in the process. Based on your experience of investing in tax savings funds, you can start adding other funds in the portfolio depending on your risk profile and time horizon.
10. Once you have run your SIP for the first ten years, I am sure you would have yourself understood the game of compounding very well and the next 10-20 years would then look like a cakewalk for you. This is my promise. I am sure many of you would have also completed ten years of your SIP investments. Pls share your stories in the comment below so that each one of us can learn from your experience too. I am super confident as I begin the next decade of my investments armed with the 10 super lessons of the last decade.
Gajendra Kothari – One idiot