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This is the third part of the SIP related Case Study where I compared the performance of following 2 scenarios:
Scenario 1: Investing regularly (Rs 5000) & periodically making lumpsum investments when markets are down. This lumpsum amount would be an accumulation of an additional amount of Rs 5000 every month (+ annual interest@8%), which will be used at one-go when markets are down (at a pre-decided trigger point).
Scenario 2: Investing regularly, double the regular amount (Rs 10,000) over a period of 20 years in a decent, well diversified mutual fund.
The part 2 of the case study was more about reader’s reactions… where many of my assumptions were questioned. And I was glad that readers were very vocal about it as it pushed me to do further analysis. If you haven’t read the feedbacks, I recommend you do it right away here.
In this part (3) of the study, I test a few other scenarios.
Please note that I initially started this study to prove that there ‘should be’ a structured solution, which could make use of following two facts – (1) It doesn’t make sense to stay out of markets at any time – Why? (2) It seems more logical to invest ‘more’ when markets are down.
But as I progressed with my analysis, it started becoming clear that it might be better to stick with simple SIP of mutual funds rather than thinking too much about investing more using a market crash fund. I am using the word ‘might’ as its still possible that people might be using a similar approach and making profitable investments when markets go down.
But for average investors, it might be a sensible to stick with SIPs.
But nevertheless, I will complete what I started….
Re-Analyzing To Include Interest Component of RD (Market Crash Fund – MCF)
In first scenario, the total money outgo is Rs 21.9 Lacs. Of this, Rs 10.95 lac is invested as SIP of Rs 5000 every month whereas rest is invested in lumpsum at regular intervals as and when a trigger point is reached. The interest on RD has been considered @ 8% per annum and has been calculated and added to MCF after completion of 12 months. Wherever trigger point is reached in less than 12 months, interest has been ignored for that 12 month period.
There is no change in second scenario and the entire Rs 21.9 lac is invested as SIP of Rs 10,000 every month.
After inclusion of interest component, there was expectation that second scenario would be trumped by first one. But still the second scenario seems to have an edge. And this time, the MF+RD combination delivers Rs 2.23 crores whereas a simple MF delivers Rs 2.43 Crores. (without interests, the SIP+RD number was Rs 2.14 Cr)
Trying Out 75%-25% Split for SIP+RD Scenario
A reader had suggested that I should also try out a scenario where SIP+RD combination is more skewed towards SIP. So I tested a scenario with 75%-25% SIP+RD combination. But here also, there were no earth-shattering differences in results. A SIP+RD of 75%-25% resulted in a corpus of Rs 2.33 Cr, which falls short of Rs 2.43 Cr of simple 100% SIP.
I think a lot of effort has already gone in analyzing these scenarios 🙂 But I will like to try out one more scenario. And that is of changing the trigger point to one which is dependent on P/E Ratio of broader markets rather than fund NAV. I will be analyzing this scenario in 4th and last part of this case study. My tentative scenario for evaluation is as follows:
MCF Trigger points will be at 15PE. At this point, money accumulated will be split into 6 parts and deployed over next 6 months (if PE remains less than 18). For pausing investments in regular SIP when 22PE is achieved, the money which was supposed to flow into SIP will be added to MCF. Once markets go down below 22PE, regular SIP will commence. But trigger point for MCF deployment will remain at 15PE.
Let me know if this scenario sounds fine to you all….or if something more needs to be added here.
PS – I know I am complicating things. But lets just finish what we started. 🙂