Case Study – Do You Have Surplus Money To Put Aside for 5+ Years? Then You Should Read This


Note – This is a guest post by Ajay who sometime back, shared his experiences with Mutual Fund investing in the post titled HowI Created a Corpus of Rs 3.7 Crores in 10 Years and its second part.
Go and ask any financial advisor about the best available options for investing for average investors, and chances are that he will recommend using SIP (or Systematic Investment Plan) and rightly so (as proved here).
But while SIP may be the best tool for someone who wants to slowly and steadily build wealth using monthly investments…what should a person do if he has surplus money to invest?
Let us suppose you have Rs 10 Lacs to spare. Where will you put that money? Savings Account? Fixed Deposits? Or direct stocks? (But no matter what you do, please don’t do this with Your Rs 10 Lacs)
Or would you do a SIP or STP (Systematic Transfer Plan)?
But what if you somehow, decide to invest the entire amount in one go? And if invested in one go, what should be the time frame for that investment? And what are the risks involved in doing so?
This post is a case study to answer some of the above questions.
But before we go ahead with this case study, let us try to answer a few questions as honestly as possible:

  1. Do you feel comfortable investing lump sum money in Equity Funds?
  2. If yes, what is the time frame you are comfortable with for this investment? – 1 year / 3 years / 5 years / 7 years / 10 years.
  3. Do you think a 5-Year Tax Free FD returns would be safer (and more) than a Mutual Fund for the same duration?

So now lets go ahead with our analysis…
For the purpose of this case study, I have chosen Franklin India Prima Plus Equity Fund (FIPPF). And returns of this fund have been compared with return of a 5-Year Tax Free Fixed Deposit. There is no specific reason for choosing this fund. It is more of a random choice. In fact this fund does not feature in the list of top funds regularly – but has been a steady performer in the long term. It is also a diversified large cap oriented fund and owns high quality stocks.
A period of 20 years (i.e. starting from 1995 and upto 2015) was considered for this study. This period has been full of economic booms and recessions and dull periods. As we are evaluating 5-Year period, in 20 years between 1995 and 2015, we have a total of 16 Five-Year periods.
5-Year annualized return of FIPPF was calculated as per the NAV of the fund – based on the investment start and end dates. Accordingly, value of Rs 1 Lac invested in FIPPF for each of these 16 Five-year periods was calculated. 
For comparison, the above calculation was repeated for all these 16 Five Year Periods for 5-Year Tax Free Deposits. (The Interest rate for 5 year FD for each corresponding period was taken from RBI website.)
Note 1 – Sensex PE Ratio for all the periods was obtained from BSE website. The site does not have PE data for periods before 1995.
Note 2 – The start and end dates of the investment were considered as 1stJan of the corresponding years.
The results of the analysis are given in table below. And the observations follow the table:

Observations
  • Out of the 16 Data points (for 5 Year periods), lumpsum investments in the FIPPF gave annual returns ranging from 3.56% to 54.89%. In comparison, returns of FD (Tax-Free) ranged from 5.5% to 13%.
  • Out of 16 data points, FIPPF gave single digit returns twice i.e. 3.56% & 6.96%. Also, twice it gave abnormal returns of 54.89% & 47.30%. Both these excesses (great for those who got it), were because of the amazing bull run which ended in 2007-2008.
  • If we were to remove these outliers on both up and down side, FIPPF returns ranged from 15.14% to 37.89%. Range of returns from FD remain same at 5.5% to 13%.
  • There was not even a single period in these 16 data points, where FIPPF gave negative returns.
  • 12 times out of 16, FIPPF gave returns between 15.14% and 37.89% annualized. This points to 75% chance of achieving similar results. And if we were to add the outliers on higher side, it will be 14 out of 16 times – which is more than 85% chance of making superior returns.
  • In Rupee terms, Rs 100,000 invested in FIPPF could have grown anywhere between  Rs 119,193 to Rs 891,663 (in blocks of 5 years over 16 such periods). If the excesses removed on both up and downside (caused mainly because of 2007-08 bull market, followed by crash in 2008/2009), then Rs 100,000  invested in FIPP could have grown anywhere between  Rs 198,821 to Rs 498,596. Majority of the times, Rs 100,000 invested in FIPP would have grown to a value between Rs 200,000 to Rs 300,000.
  • On the other hand, Rs 100,000 parked in a FD would have grown to a maximum of Rs 184,243 (at 13% peak FD interest rate). And most of the times, Rs 100,000 invested in FD would have grown to a value in between Rs 135,000 to 160,000.
  • Did market’s P/E Ratio dependent entry points make a big difference to the 5 Year annualized returns? The answer is Yes. But there is no specific pattern. A lump sum investment made in 2009, at a low PE of 12.21 (supposedly a superior entry point) gave annualized returns of 18.5% over the next five years. But on the contrary, an investment made in 2010, at a relatively high PE of 22, gave an annualized return of 16.76%.
  • Investment made in 2008 at very high PE of 25 gave the lowest return of 3.56% in the next five years. Therefore, entry at this and similar high PE points should be avoided. Except for this high PE point there is no much correlation between PE and returns. So as long as the PE is anywhere less than 21, even lump sum investing may work.
  • Did PE exit points make a big difference to 5 Year annualized returns? Yes, but again there is no specific pattern. A 27% annualized returns was made even after exiting at 13.74PE in 2003. Again, 18% annualized returns were made, even after exiting at 12.21PE (near very low PE point) in 2009.
  • One significant point to note from this analysis is that the fund NAV doubled (minimum) or tripled or more in most of the 16 data points. Though we are generalizing here, you can safely expect that in five years, chances of getting decent returns (better than FDs) are much more in equity mutual funds. And this is a very important observation.
Now after having gone through the above analysis, let us re-visit the questions we asked ourselves earlier…and see if we are in a better position to answer them now…
Do you feel comfortable investing lump sum money in Equity Funds?
Yes. But only when investing for more than 5 years.

If yes, what is the time frame you are comfortable with for this investment? – 1 year / 3 years / 5 years / 7 years / 10 years.
The minimum investment period should be 5 years. However, there is still a possibility of loss of capital if invested for anything below 5 years. Based on above analysis, an investment for 5 years in a decent mutual fund lowers the risk of loss of capital substantially.

Do you think a 5-Year Tax Free FD returns would be safer (and more) than a Mutual Fund for the same duration?
Based on above analysis, it is most likely that returns from MF will beat those of FD, significantly. But there will be inter-year volatilities.
I think that many of you would have some more questions about this analysis. I have tried to come up with a few myself and tried answering them too. So please read further…

What happens if the investment time frame is reduced to a period of less than 5 years for lumpsum investment?
There is a high possibility of loss of capital (and not only lower returns). You can easily see the NAV of the fund, which nearly doubles every five years, but falls significantly for some shorter periods (less than 5 years).

What happens if the investment time frame is increased for lump sum investment to something like 7 or 10 years?
On a 7-Year basis, the same fund shows a minimum annualized return of 9.92% and highest of 39%. If excesses are removed on both sides, the range of returns is between 15% and 36%. This is based on 14 data points.
For 10-Years, the results are extremely encouraging. The same fund shows a minimum of 18.29% and highest of 40.26%. If excesses are removed on both sides, the range of returns is between 20% and 28%. This is based on 11 data points.

Do you have the similar analysis for 7-Years and 10-Years data? 


Do you think the high returns shown on this analysis are some what guaranteed?
No. Please don’t think so. There is no guarantee that what has happened in past will also happen in future. However, chances of such returns being delivered if one invests for long term are quite high. Although this analysis of 20 years has witnessed a lot of market action, I believe that the mega bull run of 2004-2008 distorts the figures and the analysis. We may or may not get similar bull runs in future and this fact, is likely to impact future returns. Therefore it is safe to assume the lower side of the returns, say about 15% – which I strongly believe is achievable.
If you didn’t get these kind of returns over a 5 year period (like Zero Returns of 2008 to 2013), then it is only a matter of time. And you should be ready to stay invested for longer periods like 7 and 10 years. In other words, even if you come to the market with a time frame of 5 years, be prepared to stay invested for longer…upto 10 years to achieve the desired result.

Did this analysis find something which no one has found in past?
Certainly not…In fact, Prashant Jain of HDFC once said that Indian Indices double approximately in every 5 years. This analysis actually proves that statement of his (atleast approximately). Also, this analysis endorses the fact that Time in Market is more important than Timing the Market.

So should you just go out there and invest in Equity Mutual Funds right away?
No. Please don’t do it. If you have surplus money to invest, do the following:
– Decide the amount you want to invest.
– Decide your time frame for this investment amount.
– If your time horizon is less than 5 Years, equities are a strict no-no. If its more than 5 years, check your asset allocation and then decide whether you can (and should) add money to equities or not. If you decide to go for equity MF, you should be prepared to remain invested for more than 5 years too…if the desired returns are not achieved. If you cannot wait for so long, then you are better off with debt and fixed deposits. And if your time frame is 7 to 10 years, then look no further. Simply invest in a diversified equity mutual fund in lump sum mode. But just make sure that PE of broader markets is not more 24 – which means highly overvalued. And if it is, then you should wait for the market to give a better entry point.

Do you mean Lumpsum investing is better than SIP investing?
No!! Not at all. If you have surplus lump sum money to invest…and you are well aware that you don’t need this money for next 5 or more years…and also that you are capable enough to wait a few years more if required…only then you should invest in lump sum.
For an investor who invests a small portion of his savings on a monthly basis, SIP is the best way to go about his investing. He should stay away from lump sum investing. And even for SIPs, the minimum investment period should be 7 years plus.

What is your final conclusion of the above analysis?
While 5 years is a decent time frame for investing, it is still a better option to invest for a 10 years time frame. As long as the market PE is less than 24, invest with 10 year time frame, only in very high quality, long term proven, large cap, well diversified equity mutual funds in lump sum mode. If the market PE is more than 25, better wait for a more sensible entry point below 24 (or even lower) and invest your surplus in lump sum mode.
And please do not discontinue your SIPs no matter what.
Disclosure: I am an individual investor sharing my personal experience and writing this article to educate myself. I have no interest in buying or selling any of the funds mentioned in the above analysis. Investors reading this should do their own analysis and take their own investment decisions. Or if required, consult their financial advisors before making any investments.

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Written by Dev Ashish

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

31 comments

  1. Great post – thanks for sharing. Where do you recommend to keep funds for 1 year/ 3 years/ 5years? I understand any period more than 5 years, equity investments has to be in.

  2. Wonderful Post. Not to mention if one would have invested 100K in lump sum 20 yrs ago, & left it there, it would've given a annualised return of 20.71%.
    Simply amazing what 'Time In The Market' can do to ones portfolio, than 'Timing The Market'

  3. Excellent analysis. Though I would still like to follow asset allocation rule for lumpsum investment and span it over an year.

  4. Dear Mr. SP,

    This article infact indirectly justifies why we should look into PE ratio before investing.

    “In the early 1990s in India, not many investors and market
    intermediaries understood and used the P/E ratio. It was even argued
    by some prominent stockbrokers that fundamental analysis did not
    apply in Indian conditions. When asked what then was the basis for
    advising their clients, the answer was “tips, news and rumours”! Market
    movements were, therefore, often chaotic and caused frequent crises.
    For example, the average P/E ratio of BSE Sensex, which had touched
    somewhat high level of 18 around July 1991, doubled by April 1992.
    Thereafter, it halved over the next 12 months and then doubled again to
    touch 43 in April 1994. Such non-sensical movements did not seem to
    worry the stock exchanges! By early December 1996, the P/E ratio had
    fallen to 10.5, just one-fourth of the level touched in 1994!” ….. This was sourced from a website scmrd.org.

    While we could not get the actual PE data of Year 1994, from the above website article, it is quite clear that the PE in 1994 was quite absurdly high (43 in April 1994, not having the correct data for august 1994, should have been around the 40 or so). Investing in equity in lumpsum mode at that absurd level is a sure invitation for poor returns and thats why even over a 20year period it did not beat the PPF returns.

    Unfortunately, ET article failed to highlight this fact and thereby misguides the investors/readers.

    Regards

    Ajay

  5. Hi, I have a decent amount of Rs. 10 lakhs with me. Though few months back it was 15 lakhs, I lost a lot of money trading in F&O with the hope of making big bucks. Now I'm not sure whether to put all this money in one go at current valuations of 22 PE+, a relatively high P/B and low dividend yield. Combined with the low Nifty earnings, a correction in the coming months won't be surprising and in case I invest all this amount right now, it might nose dive later. So I'm thinking of putting all of it in a 6 month FD and then if the valuations are below 20, I'll invest all of it in few mutual funds and forget it for 10-15 years. Does this plan seem like a good one or should I just invest the 10 lakhs right now itself?

  6. Hi,
    Nifty was at 1081 in January 1994, and assuming even a current value of 8000 on NIfty, the returns since 1994 have been 10% compounded yearly which are better than PPF. Ofcourse, if the timing had been better, the returns would have been much higher at 12-14%+.

  7. If you don't need this money for next 15years… Simply put it in a liquid fund and transfer to equity funds over next year. It is just for your mental comfort. But be sure you won't change your mind in this period…

  8. Don't look at index. India still provides lot of opportunity in active funds.. Look at active funds and return over this period. Also, always invest in SIP mode regularly to get the max benefits.

  9. I agree. But the comment was a reply to your what you wrote “Investing in 1994 and holding for 20 years didn't even beat the PPF returns”. The data shows it did.

  10. As per the article,

    “A look at the Sensex returns chart in the past 20 years could be a bit disappointing even for a hard-core investor.

    The Sensex closed at 4,588 in August 1994 and despite being at a lifetime high of 26,420 now, it has only generated a mediocre annualised return of 9.15% during this 20-year holding period.

    Several debt products, like the Public Provident Fund (PPF), have generated better annualised returns of 10.46% in this period.”

    If you look at the PE ratio in 1994 it around 40, investment at those PE levels is bound to give low returns. Moreover look at equity funds as regular investment product that can produce superiod IRR than a lumpsum point to point return product.

  11. Are balanced funds good choice to invest lump sum in high P/E market (now 23 I guess)?
    I have 20lac lump sum now.. should I invest all lump sum in good balanced fund or diversify it in large cap, mid cap funds etc also, for long term?

    1. Recommend to look at your asset allocation and the equity allocation in that to decide on investment options. Its unfortunate more and more investor ask such questions only when the valuations of market is vey much on higher side. So is this the right time to exit market?

  12. HI
    I am pondeirng over lumpsum investment in similar way. I have following Question

    1. Does the outlook changes when the amount is 1 Crore. I don’t own a home and dont intend to buy it before i secure my retirement. Other basics like ” EMergency funds , Term insurance , stable jobs ” are well covered and can put in 1 Lakh SIP on top of it per month.
    2. Shall I spread 1 Cr atl-east over 3 years or is it ok to go ahead .
    3. I have chosen 5 mutual funds in following%age

    a. Quantum long term equity fund : 35%
    b: DSP black rock opportunity and Birla sun life equity fund : 20% each
    c: DSP micro cap and Mirae Asset Blue chip emerging fund 12.5% each

    shall i spread my lumpsum also in same ratio or consider large cap for a higher percentage for lumpsum

      1. Personally speaking, the current market is not cheap and hence, not suitable for big-ticket one-time investing. (That is my view and I can be wrong).

        It also depends on when you need this money. If its after retirement (early or regular) and if that is decades away, you can systematically invest. But if money needed is after just few years, you need to exercise caution.

  13. Sir it’s a very good article indeed and worth keeping always in mind.
    But I have one question if you invest somewhere near the top of the market you are in for a drawdown . Might be a big one and a common investor might not be ready for it. Is there any way to protect the down side like some hedging tecnic?
    Reply on email will be highly appreciated.
    Thank you for your very very informative articles. It’s sort of FAQs . One comes across these questions and wonders what would be a good dicision you have covered most of the issues.
    Thank you once again.

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