The ongoing debate regarding investment in small and midcap mutual funds and investors' commitment to their systematic investment plans (SIPs) is raging. In January, the mutual fund industry experienced robust inflows, resulting in assets under management (AUM) reaching Rs 67.25 lakh crore. During this period, there were significant inflows in various market caps, with midcap funds receiving Rs 5,148 crore and small-cap funds attracting Rs 5,721 crore.
However, there was a higher number of discontinued Systematic Investment Plans (SIPs) when compared to new registrations. This has raised concerns and questions about the underlying factors contributing to this trend.
Based on data analysed by Motilal Oswal, the initial seven years of Systematic Investment Plans (SIPs) can significantly impact your returns, particularly in volatile markets such as small and mid-cap stocks. The analysis indicates that remaining invested in SIPs for this period can lead to substantial rewards, despite market unpredictability. Even in the worst-case scenarios for a 7-year SIP in mid and small-cap stocks, the probability of loss was a mere 5.8%.
The analysis conducted by Motilal Oswal examined the monthly rolling SIP returns over 5, 7, and 10-year periods for a range of indices, including Nifty 100, Nifty Mid-Cap 150, Nifty Small-Cap 250, and Nifty 500 Multicap 50:25:25. This analysis covered pivotal market events such as the 2008-2009 financial crisis, the 2013 sell-off, and the recent pandemic.
The data clearly illustrates that investors who maintained their SIPs throughout these challenging periods achieved positive returns. The report highlights that having a 7 to 10-year investment horizon significantly reduces the risk of losses across various indices, including small-cap, mid-cap, and large-cap.
The assumption made in the analysis is that SIPs were initiated on the 1st working day of each month. The returns presented were calculated using XIRR at the conclusion of the respective SIP periods, with the valuation based on the first working day of the month following the SIP period.
SIP Performance
The research findings indicate that after holding a Systematic Investment Plan (SIP) for 7 years, the chances of experiencing a loss are 0% for the mid-cap category and 5.8% for the small-cap category. Extending the investment period to 10 years reduces the likelihood of loss to 0% for mid-cap and 0.8% for small-cap. Over a 5-year period, the probabilities shift to 2.2% and 11.7% for mid-cap and small-cap, respectively.
Therefore, for an SIP investment committing to the initial 7 years is often seen as advantageous. This implies that even if you are married to an unpredictable individual or have invested in a small-cap category, remaining dedicated for the first 7 years is generally considered fortuitous.
What's the worst duration?
In the past 7 years, Nifty 100 experienced its worst year with a 0.8% return. However, staying invested without withdrawing and continuing SIP led to a 15.1% return the following year. For Nifty Midcap 150, the lowest annual return was 0.4%, but the subsequent year resulted in a 20.4% return. Nifty Smallcap 250 faced a -7.3% return at its lowest point over the past 7 years, but rebounded with a 14.8% return the following year. Similarly, Nifty 500 Multicap 50:25:25 saw its worst return in 7 years at -2.0%, only to bounce back with a 16.5% return the following year.
Over a 10-year period, the Nifty 100 saw its worst year with a 2.8% return. However, investors who held onto their investments without withdrawing or continuing the SIP experienced a 13.6% return the following year. The Nifty Midcap 150 had its lowest annual return at 4.6%, but bounced back with an 18% return the following year. The Nifty Smallcap 250, on the other hand, had its worst year in the decade with a -1.8% return, but rebounded with a 13.3% return the following year. Similarly, the Nifty 500 Multicap 50:25:25 had its worst year with a 2.2% return, but saw a significant increase to 14.7% return the following year.