In Nifty Midcap 150 TRI index
We generally start SIP for our long-term goals. The goal can be child education, child marriage, or retirement. But the road to this journey may have many uncertainties, making it difficult to continue this SIP for such a long period. Starting a long- term SIP is easy, but continuing it is the most critical and challenging part. Let us understand it with an empirical study.
Let’s assume hypothetically someone has started a SIP of Rs.10,000 on 1st April 2005 for, say, 25 years. Let us look at the investment journey throughout these years. Every year investor invests Rs. 1,20,000 through monthly investments of Rs. 10,000 in Nifty Midcap 150 TRI index (popularly referred to as the Midcap Index)
SIP Journey: First 5 Years (Experiencing Market Fall)
| Financial Year | FY 2006 | FY 2007 | FY 2008 | FY 2009 |
|---|---|---|---|---|
| Years Completed | 1st Year | 2nd Year | 3rd Year | 4th Year |
| Investment Amount | ₹1,20,000 | ₹2,40,000 | ₹3,60,000 | ₹4,80,000 |
| Value of Investment | ₹1,70,252 | ₹2,92,731 | ₹4,63,828 | ₹3,35,831 |
| XIRR Return | 85.3% | 20.3% | 17.2% | -21.2% |
As we can see in the above table, the Initial three years, i.e., FY-06, FY-07, and FY-08, delivered decent returns. But then the Subprime Crisis occurred, as a result, the market tanked by more than 50% in FY 2009. By then, the Rs. 4,80,000 investment’s market value had fallen to Rs. 3,35,831. Looking at -21.2% XIRR returns and with negative news flowing from all around, the investor could have stopped his SIP and redeemed his investment.
But what happened in FY10? The market hit the upper circuit in May 2009. As a result, the valuation had increased from Rs. 3.35 lakh to Rs. 9.50 lakh by the end of FY10. This could happen only because the investor chose to stay invested and continue with the SIP. So, during the first five years, one may invariably experience any such bad year/years with correction or consolidation. During such times one should focus on the long-term goal and not worry about market movements. In this way, one may help his or her investments to grow over a long time
During FY11, FY12, and FY13, it was range-bound market without any significant gains. During this period, nothing substantial happened, but the market value of investments was consistently higher than the total investment amount at all points in time, with XIRR returns ranging between 8-14%. During this phase, those who have continued the SIP have accumulated more units due to consolidation in the market.
At the end of FY13, the fund value was Rs.13.59 lakhs against the investment amount of Rs. 9.60 lakhs with an XIRR return of 8.5%. Indeed, not a good return, considering the equity market risk involved. One could have chosen to stop the SIP and redeem the investment. But the investor decided to continue his SIP for the next two years. As a result, the market value had grown to Rs.29.40 lakhs with an XIRR of 17.1% against an investment of Rs. 12 Lakh. Just two years before this, the investment value was just 13.59 lakhs; at the end of 10 years, it was 29.40 lakhs. So, it took 8 years to build Rs. ~13.6 lakhs and the next Rs. ~15.8 lakhs of wealth created in just two years. This is called the power of compounding.
As we can see, from FY16 till FY23 (i.e., 11 years to 18 years), the FY XIRR returns were more than 14%, except in FY20, mainly due to Covid related uncertainties in the market. In FY20, XIRR fell to 8.7% for a short period of time. But as of 31st March 2023, the investment valuation has grown to 99.95 Lakh against a total investment of Rs. 21.60 Lakh with an XIRR of 15.2%.
Investing is just like Parenting. Parenting and making long-term investments can be challenging initially, but they can also be very rewarding. For example, the first five years would be difficult. After that, 6-10 years are comparatively less complicated, but we are laying a solid foundation during these initial phases. Raising a child and making long-term investments require hard work, dedication, and patience. But from 11 years onward, the power of compounding starts showing its strength, and one can create wealth and achieve a long-term goal. The key is to stay committed to your goals and to stay the course even when things get tough. Then, with time, you can enjoy the fruits of your labor and feel proud of what you have accomplished.
Past Performance may or may not sustain in future. Index used- Nifty Midcap 150 TRI, Valuation at the end of 1st Year is as on 1st April 2006, Valuation at the end of 2nd Year is as on 1st April 2007, Valuation at the end of 3rd Year is as on 1st April 2008, Valuation at the end of 4th Year is as on 4th Apr 2009, Valuation at the end of 5th Year is as on 1st April 2010 . Valuation at the end of 6th Year is as on 1st April 2011, Valuation at the end of 7th Year is as on 1st April 2012, Valuation at the end of 8th Year is as on 1st April2013, The returns are calculated by XIRR approach assuming investment of Rs 10,000/- on the 1st working day of every month. Source: MFIE. Index performance does not signify performance of any schemes of WhiteOak Capital Mutual Fund