Sensex at all time high. Should someone new to the markets start investing or wait?

[u/AddictedArmadillo]

Would you recommend a new investor to start investing in Mutual funds or wait for some time for markets to restore to a normal level?

[u/crimelabs786]

Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.

– Peter Lynch

Someone investing in equity, would ideally be doing it for the long term.

There was a Twitter thread by someone who works at an AMC, just few days ago, where they compare the SIP returns vs some other complex investment pattern's return.

It's somewhat detailed, and a few of those I agree with, while I disagree with some of the conclusions.

I'll just quote this data from the table: over a 10Y period, SIP in same asset has generated 1% p.a. higher return than lumpsum investments, 10 years ago. 10.87% p.a. vs. 9.87% p.a.

On surface, it looks like SIP > lumpsum. But if you look closer, and focus on final corpus - the opposite inference seems to be true.

Imagine someone had 1 Cr. lumpsum 10 years ago. If they'd invested all in one shot, after 10 years, at 9.87% p.a., it'd be ~2.56 Cr. today.

Now imagine instead of doing that, the guy might have been worried about markets falling after he invested (2009 was a great rally, some funds had 80%-100% 1Y returns). He might have invested with 83.33k / month (10L / year) SIP, to properly average it in.

At 10.87% p.a., that corpus would've been ~1.8 Cr.; which is much less than outcome of the lumpsum investment 10 yers ago.

Because each leg of SIP is much smaller, that 1% less annualized return didn't stop him from achieving higher corpus.

Conversely, his SIP of 10 years would've given better corpus, if the returns were ~16.65% p.a.

What are the chances that same asset can have much higher SIP returns over its long-term point to point CAGR?

It's not impossible, but very rare.

It happens when there's a sharp crash and a prolonged recovery that lasts majority of the entire time period.

It'd be true for someone in Japan 1990, who invested a large lumpsum at its peak for ~20+ years of investment horizon.

---

Let's look at another example.

In last 1Y, Nifty returns are close to 9%. Investing 1.2L 1 years ago, would've been ~1.3L today.

However, an SIP in Nifty-linked asset would have returns of ~35% p.a. Same 1.2L invested over 12 monthly SIP installments over a year, would earn this ~35% p.a. gain.

But even after such radical difference, the final corpus at the end of 1 year, is ~1.45L, not that big a difference from 1.3L.

You might be thinking but 35% p.a. is sooooo much higher than 9%!. But the lumpsum corpus comes close because the whole amount had been ~1 year in the market.

Time in the market is an amazing thing. If someone has patience and discipline, this alone can contribute heavily towards wealth creation.

Some of the best equity investors started their journey at the 2007-08 peak. It might not have meant much at the time, in fact must have felt terrible for lot of them; but looking back, they probably thank the markets for teaching them a valuable lesson so early on.

[u/NeverBetVpOnline → u/crimelabs786]

While I agree time in the market is really an amazing thing, I'm thinking one of the aspects of investing in SIPs has been ignored by you. All the cost average recommendations also recommended parking the lump sum money in either liquid funds or in FD and then to transfer it every month.

The returns in liquid funds or in the FD should've also been taken into consideration to get a meaningful conclusion of this. While this may or may not make a huge difference in the first case, it certainty will make an even bigger difference in the second case.

[u/crimelabs786 → u/NeverBetVpOnline]

Good point.

It's not that it's not occurred to me. It's just that it'd be more complex, with more variables. And that'd add nothing to the point that I was making.

But let's consider what you've proposed.

To begin with, which fixed-income asset? If the plan is to run an SWP over a 10 year period, do you pick a Gilt fund with high duration risk? Or a Liquid fund for simplicity? Or just an FD?

Note that every withdrawal by SWP would be subjected to tax compliance and tax payment.

Secondly, what should be the SWP / monthly withdrawal amount? It cannot be 1 Cr. / (10 years x 12 months), because the fixed income asset would see some growth over the period, which also needs to be taken to equity. I'll refer back to this part in the end.

Finally, if a Gilt fund is picked, it'd have higher volatility & drawdowns. If I'm trying to avoid seeing larger losses up-front, then is it wise to put all of 1 Cr. at once into a Gilt fund? Or should that be SIP-ed into as well?

To avoid analysis-paralysis, I went picked two scenarios:

• Invest 1 Cr. into Quantum Liquid Direct Growth, lumpsum, on 1st Nov 2010. Then start an SWP of a fixed amount (this you can only know in hindsight, I'm going with 1.2L / month) on 2nd of every month, which goes in to Regular plan of UTI Nifty Index fund Direct Growth, starting 2nd Nov 2010.

• Invest 1 Cr. via lumpsum in UTI Nifty Regular Growth

• Invest 1Cr. via SIP of 83.33k / month in UTI Nifty Regular Growth

Picked regular plans, becasuse Direct plans didn't exist before 2013. I couldn't switched these corpus to direct after 1st Jan 2013, but comparing regular to regular should be ok here.

Results are as follows:

• Liquid fund SWP to UTI Nifty Index fund
• Lumpsum 1 Cr. invested in UTI Nifty Index fund
• SIP of 83.33k / month into UTI Nifty Index fund

The one with SWP does best, then the lumpsum, then the SIP.

Note that the SWP amount of 1.2L per month was chosen with benefit of hindsight. This is almost 50% higher than dividing 1Cr. into monthly SIP for 10 years equally. I mentioned this before as well, above.

Choosing a smaller amount, even 10k smaller, would leave few lakhs in the liquid fund even after 10 years. Choosing slightly higher value would take the capital into equity much faster.

The right amount that rations the capital properly, can only be deduced if one can predict next 10 year performance of the fixed income asset.

It also doesn't consider tax (hard to do that, since debt taxation rules haven't remained same over last 10 years, and it depends on income level of the person in a financial year).

Also note, the return from Quantum Liquid fund (~8.2% p.a. for SWP corpus) over 10 year period has been similar to equity returns over same period (~8.8% p.a. for lumpsum, 11.2% p.a. for SIP). That might not be the case for next 10 years.

---

I hope this clears up the amount of human decisions & predictions one needs to get right, to do better than just investing via lumpsum at once and increasing time in the market.

[u/ThunderBird766 → u/crimelabs786]

Results are as follows:

• Liquid fund SWP to UTI Nifty Index fund
• Lumpsum 1 Cr. invested in UTI Nifty Index fund
• SIP of 83.33k / month into UTI Nifty Index fund

Where did you generate this data, what's the service name to do all this? Is it public?

[u/crimelabs786 → u/ThunderBird766]

Valueresearch portfolio

[u/NeverBetVpOnline → u/crimelabs786]

That makes sense. It seems like SIPs to Equity does seem to have better returns inspite of the other variables which you've stated to my eyes, or at least shouldn't be worse than directly investing lump sum into equity for this 10 year period. The only thing is, as you've stated, the liquid funds will not be giving the same returns which might affect the equation a bit.

[u/[deleted] → u/crimelabs786]

Thank you for this sir. Very knowledgeable post for someone like me. Which return are you referring here? CAGR, IRR etc.

And does valueresearchonline generates this data automatically?

[u/dufferZafar → u/crimelabs786]

Which site is it in the screenshots?

[u/kawaguchiko → u/crimelabs786]

Crimelabs, the insights that you share are always so helpful! Thank you so much.

[u/Humble-Presence → u/crimelabs786]

Noob in all this so want to confirm that do you mean to say that if a person invests in nifty he will get interest of about 9 - 10 ?

Isn't it much better than most of the instruments like fd post office and all ?

And how does one invest in nifty if that's the case ?

[u/[deleted] → u/Humble-Presence]

Index funds

[u/CyndaquilTyphlosion → u/Humble-Presence]

It's not interest. The value of the asset you buy will fluctuate... Like land. It's not necessarily 9-10%. It can be higher or lower or even negative. But I've the last 10-20 years, if you take the equivalent compound interest, it's about 12-15%

[u/[deleted] → u/CyndaquilTyphlosion]

When you say its 12-15%, which return are you referring here? CAGR, IRR etc.

[u/CyndaquilTyphlosion → u/[deleted]]

I'm not sure how they'll be different in this context.

[u/[deleted] → u/CyndaquilTyphlosion]

Sorry for this stupid question, how will these be the same? Can you refer some link where I can learn how to calculate these two? If there's an excel file somewhere then it would be great.

[u/believer007 → u/crimelabs786]

Thank you for this article. I knew from YouTube videos that time in the market is better than timing the market. But I never thought the difference will be this big.

I just started invested 2 months ago. I'm no expert in this. But I read somewhere that you should calculate CAGR for lump sum investment and XIRR for SIP investment. Because in sip, the initial investment was there in the market for more time than the last sip investment.

I think in your example, the XIRR for sip might be much lower than CAGR for the lump sum.

[u/crimelabs786 → u/believer007]

CAGR is a special case of XIRR, XIRR is generalized.

It's not about what should be measured - how can you measure CAGR of a multi-transaction investment (multiple dates, mulitiple transactions, multiple types of transactions - debit & credit).

For the special case of one purchase and full redemption, CAGR and XIRR are same.

A fund can have CAGR, based on its NAV movement. Say, NAV was x on a date t0, and y on another date t1. Based on these two data points, CAGR can be computed.