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  • Ankur Kapur

Do SIPs work or is it yet another financial scam?

The mutual fund industry has been selling SIP as the most conservative way to grow your wealth. Data indicates that it is not necessarily true.

Financial Advisor
Mutual Funds

A Systematic Investment Plan also called SIP, allows you to take advantage of a concept called ‘Rupee cost averaging’. Let’s say you want to invest in the equity asset class. However, you can’t predict which month the Sensex will be high and which month it will be low. So, instead of trying to predict and time the stock market, you invest a small amount of money every month. If the markets are high, you will get a lesser number of units in your mutual fund account, and if the markets are low, you will get a larger number of units. This way, you are buying when the markets are high and also when the markets are low – over a long period of time the market usually appreciates so your average cost of acquiring each unit will be low.

Let us understand whether SIPs have worked in the Indian context. We will first do a break-up of equity into large-cap, mid-cap and small-cap category. In each category, we will pick the one of the best and one of the worst-performing mutual fund. Data is sourced from

SIP is a technique and not a product. For this technique to work, markets have to deliver over a period of time.

Let’s assume Rs 20,000 per month invested in each of the mentioned below funds for a period of five years i.e. 1st September 2014 – 1st September 2019.

Investment Advisor
Mutual Fund Performance Comparison

Do you think SIPs work in India or not?

If the equity category returns are less than 10%, there is no case to invest in the equity market. A fixed deposit return on an average is around 7%. As an equity investor, you would expect at least 3-4% higher than a fixed deposit. Additionally, small-cap should generate a higher return than a mid-cap and mid-cap should generate a higher return than a large-cap.

In the current scheme of things, this relationship is in reverse order.

Current 5 year return data indicates that SIPs do not make sense. However, when you stretch the period for the same funds to 10 year return data, the returns are higher than 10% p.a.

Reliance large cap fund 10 year return = 11.5% p.a.

Kotak Emerging Equity 10 year return = 14.0% p.a.

SBI Small cap fund 10 year return = 19.1% p.a.

Return relationship also get fixed i.e. Small cap return > Mid cap return > Large cap return

SIPs work but only over a long period of time. Often advisors or distributors associate equity with 3-5 years of the horizon. However, performance data during the downturn indicates a time horizon of more than 10 years. Investors should perform appropriate due-diligence to take advantage of SIP technique.

Disclaimer: Note that SEBI’s 2018 change of scheme recategorization can interfere with the relative performance. For example, reliance large-cap fund may not be truly large-cap if they were taking 40% or 50% exposure in mid-cap before 2018. Post-2023, we will have a better picture but for now, we accept that the current performance is a fair representation. Mutual funds used in the analysis is only a representative of the sector and not a recommendation.

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