Systematic Investment Plan (SIP) has many advantages to the investor. One of the advantages is that it helps investors in rupee cost averaging as investors get more units when NAV is low and vice versa. However, Equity Markets may remain range-bound for a considerable period of time. This may result in negligible or negative returns to the investors. Such scenarios may lead to redemption/discontinuation of the SIP by investors.
However, historical analysis shows another dimension. It was observed that investors who continue the SIPs irrespective of results in the short term benefitted in the long term. A study conducted on historical returns of HDFC Equity Fund (Fund-A) and HDFC Top 100 Fund (Fund-B) has found that whenever 2-year SIP returns are negative, next 3 year returns, as well as total 5-year returns for the SIP, have always been positive*. (Refer table below & next page). In this analysis, we considered past 2 year SIP returns as well as next 3 year SIP returns for every month after inception (total 236 and 210 observations respectively) and whenever last 2 year SIP returns were negative (total 49 and 41 observations and median negative returns of 10.4% and 8.6%), next 3-year median SIP returns where 30.24% and 30.3% and total 5 year median SIP returns where 19.84% and 19.2%.