# Case Study – Combining HDFC Top 200 & Recurring Deposit – Part 4

This is the fourth and final part of the SIP Case Study which made use of HDFC Top 200 as the chosen fund. In previous post, I had evaluated the impact of considering the interest accrued on Market Crash Fund. You can read that analysis here.

In this post, I am evaluating the impact of changing the trigger point to one which is dependent on P/E Ratio of the index rather than NAV of the mutual fund (HDFC Top 200 in this case).

So after much deliberations and reader feedbacks, I came up with the following scenario to evaluate:

Scenario 1:

Investment of Rs 10,000 will be split between MF SIP & Recurring Deposits on basis of following conditions:
• If index PE between 17 and 22, SIP=Rs 5000 and RD=Rs 5000
• If index PE>22, SIP=Rs 0 (i.e. SIP stops) and RD=Rs 10,000
• If index 15<PE<17, SIP=Rs10,000 (i.e. SIP doubles) and RD=Rs 0
• If index PE<15, SIP=Rs 10,000 and RD=Rs 0; and Market Crash Fund (MCF) is utilized as follows – As soon as PE goes below 15, accumulated MCF is split into 3 parts. First part is deployed immediately and remaining two over the next two months.

Simple speaking, MCF Trigger point will be at 15PE. At this point, money accumulated will be split into 3 parts and deployed over next 3 month. SIP investments will stop if PE>22. SIP investments will double if PE<17.

The graph below shows the amount invested in SIP and amount added to MCF for all months starting 1996. I have also added the index PE for the day to show the correlation between the PE and amounts going into SIP and MF (as explained in scenario above).

 Correlation between Index PE & SIP+RD Amount (monthly basis)

As usual, the above ‘complex’ scenario was compared with a simpler one below:

Scenario 2

Investing Rs 10,000 every month, without any regard for markets movements, PE levels or for that matter, anything.

Note – Since the chosen fund – HDFC Top 200 started in 1996, I required index PE data starting from 1996. But problem I faced was that index PE data is available starting only from 1999. Hence, from 1996-1999, I chose SIP+RD (Rs 5000 each) irrespective of index or PE levels.

Final Results of Analysis
In first scenario, the total money outgo (put in SIP, used from Market Crash Fund and money still lying in MCF) is Rs 23.1 Lacs. Of this, Rs 12.8 lac is invested as SIP, whereas around Rs 5.5 Lacs was invested in parts, at regular intervals, as and when a trigger points were reached. The money currently available in MCF is around Rs 4.8 lacs, where interest 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 21.8 lac is invested as SIP of Rs 10,000 every month.

I have chosen the SIP investment (& PE) dates as the first trading day of the month (whether 1st, 2nd, 3rdor 4th…)

So results are as follows:

This time, the pure MF SIP (Scenario 2) delivers Rs 2.46 crores. And a combination of SIP+RD (Scenario 2) delivered Rs 2.47 Crores. If we were to include the money currently available in MCF, it would be Rs 2.52 Crores.

 Scenario 1 & 2 Comparison

So…let see what it means…

It might seem that SIP+MF combination has beaten the pure SIP this time. But in reality, it’s not true. Why?

I have not considered the penal charges & tax implications of liquidating the MCF (via RDs). Though it might not be significant, it still brings down the returns over a period of almost two decades. Another thing to note here is that I have considered interest on RD as 8% calculated yearly. This itself can fluctuate depending on prevalent interest rate scenarios during the last 20 years.

But most importantly, this outperformance of Rs 1 lac (or Rs 6 lac if you consider the accumulated MCF), requires you to monitor PE ratio all through these 20 years and be ready to calculate how much to invest (if PE breaches 15 on lower side or 22 on upper side) every month. Also the charges of starting / stopping RD, and for that matter SIP is also something which needs to be taken into account.

By the way, if you are interested in having a look at the exact numbers, click on the image below:

 Full Analysis

So this analysis has once again proved (like previous parts 1, 2and 3) that, for average investors, it is more than enough to continue investing as much as possible every month in a good diversified mutual fund. They should not pay much attention to ups and downs of markets and whether markets are overvalued or undervalued. No need to put your money regularly in a Market Crash Fund (MCF) solely for purpose of investing in MF when markets are down.

 PE Ratio of Index & Amount Accumulated in Market Crash Fund

But if you are lucky to have some surplus funds when markets are trading at low valuations (around PE15), then make it a point to invest. Don’t be afraid. People around you would try to convince you not to invest. They will try to tell you that markets will go down further. Please don’t listen to them. Even if it goes down (even upto PE12), remember that it will soon revert back to mean (17-18) and then you will be happy that you invested during the downtimes.

What Will I Do?

Personally, I do maintain a Market Crash Fund (MCF) which is funded by interests, dividends and any surplus income which I generate. And I use this fund for buying direct stocks (as and when I feel that stocks I like, are trading at low valuations). I generally don’t use this MCF for MF investments.

So what will I do going forward?

The above analysis clearly shows that there is not much point in taking such an approach. And that is because the additional returns generated by this approach do not justify the efforts put in last two decades. But when not buying individual stocks, I might still use my personal MCF to buy MFs in lumpsum. But I will do it only when I am not absolutely sure of which stocks to buy… but I am pretty sure that markets are grossly undervalued and should be invested in.

#### Written by Dev Ashish

Founder - Stable Investor Investing | Personal Finance | Financial Planning | Common Sense

1. chintamoney says:

what if the RD is replaced with Arbitrage fund I think the returns will make sense far better from taxation POV as well as flexibility POV

2. bharat shah says:

indeed worth conclusion and insightful your forward take a way. i t is not inappropriate to quote Prof. Pattu here;'If you think the market is over-valued, take some money off the
table, if you will but do so because you would like to reduce stress and
rest easy and not because you would like to maximize returns.'

3. nirav says:

I feel that such analysis made in bullish times and at high PE market will favour 100% SIP.Because the end point itself is high.If the end point is in bearish market than 50%RD + 50%SIP will be more favourable.

4. Kalyan says:

Thanks Dev for all the hard work. It gives a lot of encouragement to average investors like me who like to put their investments on auto mode. The simplicity is just unbeatable. You have given us something to revisit in times of doubt and a means to silence detractors. Now I can rest easy and stay the course, no matter what happens.
I cannot put it in words how much this helps. Thanks again!!

5. Jay says:

I second Kalyan. Wake up call for all of us who would like to believe we're 'smarter' and can 'time' the market than the plain jane SIP investor. Thanks for reminding us that too much jugglery is harmful for financial health.

6. Ajay says:

Dev,

As I commented in your 1st post on the same subject, the 75:25 Balanced Fund (HDFC Prudence a renowned Balanced Fund by the same fund manager) beats all the above calculations and returns.

If one had invested 10,000/- per month since Oct 1996 till Jan 2015 , i.e. a total investment of 22 Lacs would be 2.67Crores as of today. (Just for fun, even if I consider a 10% fall in the market tommorrow , it would still be more than 2.4Crores).

This is unmatchable by any other means of investing for a common investor except for those ones who only invested at every bottom and booked profits at every top and repeated everytime succesfully throughout this period. It is simply impossible for an investor to do that sucessfully over this long period.

Moral of the story is – In the very long term the SIP works. If you have additional funds just see when you need it back, if it is after say more than 7 / 10 years, simply put in a good diversified equity or balanced mutual fund, forget looking anywhere else. Always look at your asset allocation to decide on where to invest.

7. Thanks a lot for your kind words Kalyan.

Though eventually my hypothesis was proved wrong, I think this exercise helped me simplify my own investment framework a lot…and this will help me in future…glad that readers also found it useful.

And as the greats have said – 'Successful investing is simple, but not easy' …so we now just need to stick with what we have just deduced. 🙂

8. Though I got proved wrong (on my initial hypothesis), I hope eventually I end up richer by keeping my finances simple 🙂

9. Hi Nirav

I put a filter of PE<15 and compared the amounts in both scenario - seems your observation is correct 34 times out of 38. But average out-performance in these 38 instances have been 2.1%

10. Hi Bharat

Really like the part about reducing stress in investing. Most of us forget about it while taking investment decisions. Thanks for sharing the thought..

11. Its possible Chintamoney…But as far as actual outp-erformance of one of the two scenarios is concerned, I think the simplicity of simple SIP (without any stress, switching efforts and costs) is the preferred choice.

12. Balanced Fund seems to make a lot of sense for a majority of investors Ajay. And the moral of the story part seems really apt. If one does not need money for next 7-10 years, its best to put it in a good MF, irrespective of market valuations…and I think this in itself can be a good case study to see and generalize…will do it soon 🙂

13. Ajay says:

Hi, I have done this study on 5 year and 7 year returns basis starting from 1995 till 2013. Will try to share the data some time later. It is a quite interesting analysis.

Regards

14. KP says:

Great help. I personally follow MCF+MF approach 50-50. Now will follow 100% MF which is simple and easy. I am investing in HDFC Equity…appreciate your work…

15. Krish says:

Dev,

Great article. 3 yrs ago, I had started an experiment of investing equal sums in RD and HDFC Midcap opportunity. A year down the lane, discontinued the HDFC MF by its disappointing performance but continued RD. I regret the decision even today. Certainly I could have reaped great returns by sticking to MF.

Could you please summarise in Table format all your scenarios of comparing MF with RD returns.

16. Govar Balakrishnan says:

Just to press this discussion further, I think we can and should try another alternative.

Some ground-rules: SIP is very powerful. It mostly works. Based on all the analysis done, SIP should be done as much as possible. But wait a minute, continuing SIP when say PE=25 doesn't make a lot of sense, does it? We can't have an arbitrary PE to stop SIP. Stopping SIP and pumping crash-fund should be based on sound rationale.

There may be an alternative. A 1-year rolling returns analysis of HDFC Top-200 NAV vs. Nifty PE is very revealing:
1) The chart clearly indicates that the 1 year rolling returns is DIRECTLY correlating to Nifty PE. The trend-line is clear.
2) It is clear that you are more likely to lose money (negative 1 year return) if you invest when PE>22.
3) You are confirmed to lose money when PE >23.5 (one year return) based on historical data.
4) Based on collective data, you are more likely to make more than 10% when you invest when PE< 20.5/20.75.
5) Average rolling returns have been 20%+ when PE<19.

What all this means that if you choose alternatives (such as FD/RD) instead of HDFC-200 when PE<20.5 you are losing out on returns.

So the strategy should be simple:
1) For HDFC Top-200, do a SIP until PE is <20.5 or 20.75.
2) When PE > 20.5/20.75, stop the SIP and accumulate money. You can park in RD etc. if needed. Once PE comes back to below 20.5/20.75 levels, pump in the accumulated money periodically (not one shot) depending on how much you've accumulated. Waiting for PE levels of 15/17 etc. means that you are losing higher returns.

The “SIP stop” PE trigger is different for different funds. For ex: HDFC Prudence has a good chance of delivering >8% if you invest before until PE is 21. Beyond that, the 1 year returns dwindle and becomes -ve after 22.25 or so.

17. Anand Sancheti says:

This is a GREAT case study. For an average investor (like me) message is clear. Enter the market early, Choose good Mutual fund, be consistent in the investment, Think long and have patience… Glory is yours….

Way to go Stable Investor…..

18. Thanks Anand…

You have really distilled the essence of the case study in your following sentence

“Enter the market early, Choose good Mutual fund, be consistent in the investment, Think long and have patience”

🙂

1. Santhosh says:

Hi Dev,

I like to thank for this wonderful site. Your topics related to PE is wonderful !!!!.
Keep doing good work. God bless you..

Here I like to convey a point.

1).In mutual funds we can enjoy “Long Term capital Gains”. So we can withdraw all the money except the last one year period’s SIP amount.(ELSS funds have 3 year lock-in period)

2) Park the withdrawn amount in FD.

3) Wait for the PE to come down at reasonable rate,(i.e) PEs are ranging within a limit–>Consolidation.

4) Redirect the parked FD amount in the fund again in two or three bulk transfer.

1. Dev Ashish says:

Thanks Santhosh 🙂

19. That is quite an analysis Govar. It might actually make sense to stop investing when PE breaches 21 (atleast in this case). But its possible that markets might continue to stay above 21 but below 22 for more than a year….we can't rule that out. But still, better avoid the losses… Thanks for the detailed comment an analysis. I am taking the liberty of sharing the image which you mailed for the analysis in this comment…Thanks

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20. ajay says:

Dear Mr. Govar,

Appreciate your further analysis. However, if the money is not requried for next 10years, just invest in good diversified equity fund and forget it, it will give better returns than most other investment. Just make sure you are not investing at a market PE of 24 or so. Even if you invest at PE of 24 over a 10year period you will make decent returns. The problem is not at what level you are entering, it is after how many years you want to exit.. determine this before you invest.

21. Govar Balakrishnan says:

Well said Ajay. It's proven through graphs as well (attached) – the trend-line is clear. The only discussion point is on short term returns at different PE levels, which does vary significantly according to PE levels.

22. Girish Sidana says:

Dev, I just got to know of your blog yesterday and read a lot of it. This story is indeed an eye opener. I have read about Value Investment Plan(VIP) sometime in 2011 and it was being said that it will replace SIP in times to come, although I have not seen it happening. One does not get a better RoI in VIP but you achieve your goal faster than the stipulated time as compared to SIP. VIP may not work best during prolonged bull or bear runs. It can at best give better returns during sideways market movements.

In VIP you invest, lets say Rs 10,000 in first month. If your targeted return on it is 15% then after 1 month the value of your investment should have been Rs 10,125. If it is less by Rs 25, then next month invest Rs 10,025 but if it is more by Rs 25, then invest Rs 9,975 only in the next month. So on and so forth.

You may like to check this with real data and a real MF scheme over a long period.

23. Thanks for sharing this interesting perspective of VIP, where it targets faster acheivement of one's goals. I will check it out and see if I can do something on this.
Thanks once again Girish.

24. Girish Sidana says:

Hi Dev, have you been able to spare some time to check this on real data? I have one more perspective and variant in my mind. Would like to discuss that post you do your analysis on this.

25. Sorry Girish…havent been able to check it till now. Will do it soon.
But feel free to drop me a mail if there is something which you want to discuss. Possible that it can give another perspective to what is to be analysed about the VIP analysis