It is futile for investors to wait for the market to bottom out and they should start systematic investment plans as early as possible to get maximum returns, according to experts.
People often consider that markets are on the higher side and ask if they should start SIPs right away or wait for a couple of months, Manuj Jain, co-head–products and strategies at WhiteOak Capital AMC, told BQ Prime's Niraj Shah.
"People who time the market ended up making less money as compared with somebody who started at the top."
In the last 27 years, there have been nine periods when markets have corrected more than 20%—the difference between somebody starting at the top and bottom is roughly only 10 basis points, except in 2020, because it has been only 3.5 years, said Chirag Patel, co-head–products and strategies at WhiteOak Capital AMC.
"Do not wait for correction, because when you're doing an SIP, you are automatically averaging at all instances. So, you are taking advantage of all those instances," he said.
Does Timing Matter?
"Our study shows that actually, whether you do daily, weekly, or monthly SIP, over a long period, your return difference would appear after the third decimal point," Patel said.
According to him, the most important thing is that investors should run an SIP as long as possible, such as 10 years or 15 years.
If you're looking for at least a positive return, come what may, at least eight years is the time period to stay invested, Jain said. "The moment you cross eight years, historical data suggests, anybody who has run his SIP for eight to 10 years, till now they haven't got any negative return from Sensex."
About 99% of the work is done when you start early, and run it for a long period of time with the discipline of investing constantly, Jain said. "The rest, like which day you select, which sequence you select, whether you pause for a couple of months or not, this is just 1% of the entire concept of SIP."
Watch The Full Video Here:
Edited Excerpts From The Interview:
I saw this study that you did, may be about a month ago. In that, the few inferences and the few data points that you are showing show that agar maine teh kar liya hai ki maine invest karna hai, then when do I invest doesn't matter, why so?
Manuj Jain: Right now, a lot of new investors are coming into mutual funds. I mean, they like the mutual fund product and day by day, we see the SIP book is touching the sky. Many a times, people ask us that should I start my SIP right away or should I wait for may be a couple of months, may be a couple of quarters, because many people believe that markets are on the higher side. And they want to start investing at the bottom.
So, we did an interesting study. We took some 27 years of data of Sensex TRI (total return index). And, 27 years is a large enough sample size and we have taken all those periods when Sensex has corrected more than 20% from the peak. Obviously, let us accept this fact that only in hindsight we will know what is the market cycle's peak and what is the bottom. But, let us assume that one can time the market and you can precisely predict what is going to be the date for the market to bottom out. So, we did this analysis and came up with this analysis of nine such market cycles when market is nothing more than 20%.
Let me give you one example. So, like all of us know that during global financial crisis between 2008-2009, the markets had corrected more than 60% from the peak. So, somebody would have started an SIP in January 2008, which in the hindsight we know was the peak of that market cycle, while somebody would have started SIP at the bottom of the market cycle which is March 2009. So, if you have analysed this data point, if somebody would have started at January 2008 at the top and continued investing via the SIP till now—till let us say September 2023—the approximate return he would have got is about 13%. And during this period, whatever money he has invested, that would have grown by 13.2% versus somebody who would have started right at the bottom. He would have made 13.3% ex-IRR (internal rate of return). So, the data of differential is 0.1.
The second guy has delayed investing by 14 months. Let us say he has invested Rs 10,000 per month. So, he has invested Rs 1,40,000 less as compared to somebody who had started immediately without waiting for the bottom. So, because the second guy has invested Rs 1,40,000 less by delaying investment for 14 months, the Rs 1,40,000, in 14 instalments, is not getting the compounding benefit. So, while the returns look almost similar, the guy who started immediately—in January 2008—has made more wealth as compared to somebody who has waited for the bottom. And even if he would have precisely timed the market, he ended up making less money as compared to somebody who started at the top.
Chirag, were there some anomalies that happened with this time period versus some of the others? What do the other time periods suggest, for example?
Chirag Patel: I will just give you a gist of why this happens. For example, there is a correction of one-month period. So, from May 2006 to June 2006—a one-month correction, and market corrected by 29%. So, those who started SIP in May, had to bear just one additional instalment, which is of say Rs 10,000. And those who started at the bottom or may be they are lucky and they are starting at the bottom. So they have invested one instalment less. Today, the difference between the wealth is Rs 80,000. So actually, the one additional instalment that has been invested at the top of the market at that time has grown at eight times, because at that time, the Sensex TRI was in the range of 15,000 and today it is 65,000. So, whether you are investing at 15,000 or 10,000 kind of TRI level, today it is at 65,000. So, it is much more higher. So whether you are investing at 15,000 or 10,000, it doesn't matter today.
So, basically for example, if Sensex is at 5,000 and it corrected by 20%, then it is a 1,000 point drop. Today, if it corrects by 1,000 point it is just 2%. So, when you plot it on a graph, over a long period, that 20% correction would look like a 3% kind of correction today. So it doesn't matter a lot.
Manuj Jain: For all the nine studies—like I told you that in the last 27 years there have been nine periods when markets have corrected more than 20%—the difference between somebody starting at the top and bottom is roughly only 10 basis points, except in 2020, because it has completed only three and a half years. So as you move ahead and as you complete your SIP for seven years, or 10 years, the return differential goes away. But let us say, in the first or second year it will be seen, at least in percentage terms.
The note has a multitude of other examples. Do you want to fill us in on some other details as well, which should ideally make our viewers and our readers understand that trying to time the market for mutual fund investments is futile?
Chirag Patel: Actually, we carried out this study because as a product head, we used to get lots of queries like: Which date should I start an SIP? Which frequency either I should keep daily, weekly, monthly? Whether I should do it on my own, whenever market corrects?
So, we had a lot of such queries and we used to answer them. But what we finally told them was the most important thing is you should run an SIP as long as possible, for example, 10 years 15 years. This is the most important thing. I am picking this quote from Howard Mark's book that what is the most important thing you should do an SIP for 10 years or 15 years. All this metric doesn't matter over a long period of time and that is how it started.
One interesting thing is that people generally think that daily SIPs will bring higher returns than weekly or monthly SIPs. Our study, over the 27-year period, shows that actually whether you do daily, weekly, or monthly SIP, your return difference would appear after the third decimal point, over a long period of time.
So, don't try and think that you want to do a daily, weekly, monthly, or quarterly SIP. Do the SIP and returns will take care of themselves. Is this a universal concept, across time periods?
Manuj Jain: Let us say, if you are doing this analysis today. And over the last one week, markets were very volatile. So, may be a daily SIP will look good. But if you are doing this analysis, with five-year, seven-year, 10-year data, which is generally suggestable, that if you're starting an SIP, you should run it for may be 10 years or 15 years. There is no point doing an SIP for just six months or one year. So what Chirag has just told you is that it doesn't matter. It is only adding transactions in your bank account statement.
So, somebody doing a monthly SIP will have 12 transactions. And assuming that people generally do three to four SIPs. Four SIPs a month mean roughly about 48 transactions, but if you're doing daily SIPs and that too four SIPs. Daily SIPs mean 250 transactions approximately. Multiply that by four, which means 1,000 transactions in a bank account. So why, for what reason? It is an operational nightmare and you're not getting anything. So, there is no harm in doing daily SIPs, but you are putting too much emphasis on something which has no relevance over the long term.
Chirag Patel: Which is not the most important thing. For example, which date one should keep? Whether it is the beginning of the month? Whether it is the end?
That's a very common topic. A lot of people say, 'Hey, I want to do this to the seventh of the month or the 15th of the month'. So, what is the outcome of your study on that?
Chirag Patel: There are 28 days because keeping February in mind. If you do SIP for a 10-year period, whichever date you pick, all SIPs will give you more or less the same returns.
Manuj Jain: At times, day one SIP will give you one basis point higher return. At times, it is the second. So this is also random. If you are doing this study in September and you want to get this one basis point extra let us say it is second. If you do this analysis again in October, that date will be let us say seventh. So this number will keep on changing depending on which date market is up.
Chirag Patel: So, what we suggest is, the day you get your income for a particular month, should be the right date for your SIP.
What else did the study show?
Manuj Jain: Many people say that my SIP periods are not good. I'm running SIPs for last three-four-five years, like during the Covid time, even the five-year returns were pretty poor. So, many people say that I started SIP with a view of 10 years but it has been four or five years and my SIP returns are less than average. Also, it is in single digit. Sometimes, it is negative also. That can pretty well happen. Shall I keep running the SIP? People start losing faith.
So we did this analysis again with 27 years of data on rolling return basis. Let us take 8% as an ideal rate. Those investors who get less than 8% return in first five years, end up getting above average return on a 10-year basis for the entire bucket of the portfolio. So, you would need more units for the first five years. So, as you know, the initial units make you the highest compounding. So if initial units you're buying at a lower valuation, that is the reason why you have a lower ex-IRR return in the first five years, you end up making above average returns. So you should feel happy that my first five years' SIP returns are less than what I would have anticipated.
Okay, Chirag, let us say an investor is worried that in the next six months because of elections and because of this global geopolitics, the markets could be lower. Therefore, she says that I want to stop my SIPs for six months or nine months, and then restart again. It is akin to timing the market. What about this investor? Does your study have any relevance around this?
Chirag Patel: Basically, the study number seven that we call in the report that you know if you start at top or a bottom for example, anything happens, any geopolitical situation or anything happens and the market corrects by say 10% to 20% and you stop your SIP. For example, it is a six-month period. So, the six months instalment will not get invested. And at the bottom you restart it. But it depends on how far you want to go. You want to continue SIP for eight or 10 years. In eight years or 10 years, the market would be in a different territory. At that time, by not investing the sixth instalment you would be at a loss. So I think, you lose this compounding opportunity.
So the basic point is, do not wait for correction, because when you're doing an SIP, you are automatically averaging at all instances. So you are taking advantage of all those instances. So, if it is an SIP, you don't have to worry about all those things.
Manuj Jain: Also, there will always be some reason or the other for you to delay your investments. Like today, you mentioned about some geopolitical events that we are discussing or let us say election. Six months down the line, there will be some other discussion points. I think the core principle which you have highlighted many times on your show is that you start early, you run it for a long period of time, you show the discipline of investing every month, or let us say every week, or everyday. Ultimately, this is 99%. The rest, like which day you select, which sequence you select, whether you pause for a couple of months or not, this is just 1% of the entire concept of SIP.
So we've discussed four or five key takeaways. Is there something else that is a real standout feature that you guys want to bring out?
Manuj Jain: We have tried to answer some of the frequently asked questions from the investors. One of the questions is, what is long term? We all say that you should invest for long term. Is it three months, 30 years, or 10 years? So we did this analysis again, using the rolling return. And we have tried to showcase that when you do a three-year SIP, versus five-year, versus 10-year, versus 15-year. So, obviously when you do a three-year or five-year SIP, there will be times when even a five-year SIP can give you negative returns. While the probability is very low, but there's still some probability. The moment you cross eight years, historical data suggests, anybody who has run his SIP for eight to 10 years, till now they haven't got any negative return from Sensex. So what is long term, at least if you're looking for at least positive return, come what may, at least eight years is the time period.
Secondly, as you increase your time horizon from let us say, eight years to 10 years to 12-15 years, the probability of you making a reasonable return—let us say reasonable return definition is double digit or maybe 12%—goes up significantly. So, as you approach eight to 10 years, the probability of making positive return is almost 100%, at least in historical data. And, as you increase your investment horizon to 12-15 years, the probability of making double-digit return is more than 90% approximately. So this is another question that we tried to answer using the long-term data.
A lot of people might say that we may not have the capital to invest for 10 years, somebody who drives my car, by the way, told me the same thing and the tukka that he came out with eventually was that he split up his SIP amount into two or three and saying that some of this amount if not all, I will be able to keep for as long as 10 years. If I need some emergency money I can take out one of them without impacting the others. Though, keep in mind, even if you have a bulk amount, you can always withdraw from that existing scheme that is undergoing. So, don't get worried about whether the amount will be needed in five years, or six years. Mutual funds are very liquid, you can redeem the money on the day you want and get it in one day or two days.
Have I missed out on anything else that the study brings about?
Chirag Patel: One day, one of my friends called me and told me “whenever my SIP gets deducted, it is the high of that month”. So, we also prepared that data.
So, if you are the luckiest person and you are able to invest at the bottom of the market every month, and like my friend, someone is investing at the top of the market every month, and there is someone else who is Mr. Discipline, investing on 15th—for all of them, returns are the same. There is a difference of half a decimal point. The basic principle one needs to follow is to continue your SIP for eight years, 10 years, or 15 years.
Manuj Jain: The guy, who is the luckiest one and who precisely predicts that this is the day to invest every month, ends up making 20 basis point higher than the average return.
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