A number of investment portals offer tools that enable one to calculate the so-called ‘SIP returns’ of mutual fund schemes. Most fund houses also offer similar calculators for their schemes. Some offer these calculations in their monthly fact sheets. But does looking at the SIP return of a fund serve any purpose? In this post, I will attempt to show that SIP returns are of little use, and that one is better off not using these returns to draw any conclusions. To keep things simple, I will restrict my thoughts to SIP returns of equity funds.
The SIP return of a fund is not a representation of its performance. It only tells us the return that an investor would have got if he/she had opted for an SIP in that fund, over a particular period. The SIP return from investing in a fund can be, and indeed often is, very different from the fund’s actual return over the same period. As an illustration of this, I have given below some data of two of the oldest diversified equity funds in India. (PS: All the SIP calculations in this post assume equal monthly investments made on the first business day of each month from the starting month till the penultimate month. Loads are not considered in any of the calculations.)
| Fund A | Fund B | |
| NAV- 01 July 2004 | 70.67 | 47.73 |
| NAV- 02 July 2007 | 228.91 | 142.70 |
| Absolute Fund Return | 223.9% | 199.0% |
| Absolute SIP Return | 65.4% | 75.9% |
| Fund Return (p.a.) | 47.9% | 44.0% |
| SIP Return (p.a.) | 35.5% | 40.3% |
Over the 3 year period mentioned above, investors in both funds who opted for a SIP saw a lesser return than those who put a similar amount at one go, at the start. You may also notice that while Fund A gave a higher return than Fund B, investors who opted for a SIP in that fund saw a lesser return than those who opted for a SIP in Fund B.
If we now look at the 3 year period that immediately followed, a pretty different picture emerges.
| Fund A | Fund B | |
| NAV- 02 July 2007 | 228.91 | 142.70 |
| NAV- 01 July 2010 | 263.45 | 195.03 |
| Absolute Fund Return | 15.1% | 36.7% |
| Absolute SIP Return | 41.7% | 35.1% |
| Fund Return (p.a.) | 4.8% | 11.0% |
| SIP Return (p.a.) | 24.0% | 20.6% |
Investors in Fund A who opted for a SIP over this period, saw a better return than those who put a similar amount at one go, at the start. Investors who opted for a SIP in Fund B saw a lesser return, in absolute terms, than those who made a lump sum investment, at the start. However, if you consider the time value of money, as reflected in the annualized returns, the SIP investors benefitted more. In contrast to the previous 3 years, over this period, Fund B gave a higher return than Fund A, but investors who opted for a SIP in that fund saw a lesser return than those who opted for a SIP in Fund A.
In the examples above, both the fund returns and the SIP returns were positive. Yet, it is possible for one or both of these to be negative. The data below, of another diversified equity fund, illustrates the possibility of a fund’s return being negative, and SIP return being positive.
| NAV- 01 Jan 2008 | 40.71 |
| NAV- 01 Jan 2013 | 33.49 |
| Absolute Fund Return | -17.7% |
| Absolute SIP Return | 24.9% |
| Fund Return (p.a.) | -3.8% |
| SIP Return (p.a.) | 8.8% |
There is also the possibility of a fund’s return being positive, and SIP return being negative, as the data below, of yet another diversified equity fund, shows.
| NAV- 01 Dec 2003 | 29.86 |
| NAV- 02 Mar 2009 | 51.98 |
| Absolute Fund Return | 74.1% |
| Absolute SIP Return | -2.3% |
| Fund Return (p.a.) | 11.1% |
| SIP Return (p.a.) | -0.9% |
So, what explains these numbers?
While a fund’s return does influence the SIP return, the extent of that influence depends on the pattern of NAV movements over the period. Odd as it may sound, some patterns cause the SIP return to exceed the fund’s return, while others bring down the SIP return to below the fund’s return. But knowing the effect that a particular pattern has, doesn’t really help because neither can a fund manager control the pattern of NAV movements for a fund, nor is it possible to predict the future pattern for any fund.
In this backdrop, consider this: even if we believe that a more competent fund manager is likely to generate better fund returns than a less competent one, the pattern of NAV movements may make it possible for a SIP in a poorly performing fund to give a better return than a SIP in a well performing fund. The only thing resembling any kind of certainty is that the longer we carry on a SIP, the more likely it is for the SIP return to mirror the fund’s return.
Yet, every now and then I come across supposed advisors who wax eloquent about how some funds are “more suitable for a SIP.” At the start of each year, and occasionally in-between, I also see recommendations pop up for “the best funds for SIPs.” To anyone who understands the maths of SIP returns, these are flawed notions which consciously or not, capitalize on the misconceptions of investors. But all of these pale in comparison to a remark that was brought to my attention, that The Economic Times attributed to the CEO of a fund house: “our CIO-equity runs… …the number 1 fund in the country in 10-year SIP (systematic investment plan) returns.” The statement may be factually correct, but to me, the mention of SIP returns in that sentence is nothing short of deception.
As I see it, SIP returns serve little purpose and are best ignored.
