Building Wealth through Systematic Investing in Mutual Funds – A Case Study

(Updated 2019-20)

Note – This is a guest post by Ajay, a regular reader of Stable Investor. He has written many useful posts here on accumulating funds for recurring expenses, investing surplus money in mutual funds, his own super-detailed experience of accumulating Rs 3.7 crores in 10 years (this is one of the big SIP success stories). Alongwith with Ajay, I also did a super detailed comparative analysis on Real Estate Investments vs. Mutual Fund Investments in India.

So over to Ajay – who is once again highlighting the importance of systematic investing in creating long term wealth by SIP in mutual funds.

Wealth SIP Equity Funds
For years, mutual fund companies have been trying hard to convince retail investors about the benefits of SIP. Investment advisors, newspapers, personal finance magazines and even blogs have been doing it for years.
But sadly, despite the Indian mutual fund industry being more than 25 years old, only a small section of the retail investor community has benefited from investing in mutual funds in the real sense.
And this is not a general observation. It’s a fact which has also been highlighted by a well-respected fund manager from Franklin Templeton, based on the analysis of their mutual fund folios after completion of 20 years of Franklin Blue Chip Fund.
According to their study, despite the fund delivering consistently high and market-beating returns, there are hardly any investors who have profited fully from this fund.
The reason for this can be attributed to the fact that most of the times, retail investors are sold products that don’t meet their requirements. The distributors & agents only sell products which give the highest commissions. And this does not stop at that. These agents and distributors then convince investors, to churn their portfolios continuously to extract more commissions from them!
Now there is nothing new or radical that is being said in this post. And you might have already read similar articles about SIPs on other blogs and personal finance magazines. This post is a reiteration of our strong faith in the power of regular investments through Systematic Investing Plan (SIP). We will use fact and figures to further substantiate this faith.
So let us get into the details now:
For this multi-scenario case study, we have chosen the mutual fund scheme: Franklin India Prima Plus Fund – Growth (now called Franklin India Equity fund since 2018-19)
An amount of Rs 10,000 was invested monthly (via SIP) in this fund starting from July 2000 (for a 15-Year Period for this case study).
Now we did not attempt to time the markets or try any other complex techniques. We just focused on doing a plain and simple, monthly SIP of Rs 10,000 for a period of 15 years.
If you want, you can see the entire investment statement by clicking on the small image below:
Franklin India Fund SIP
To summarize, a regular monthly investment of Rs. 10,000/- from July 2000 to June 2015 (with the 1st trading day of the month taken as the SIP day) was done. This amounted to an actual investment of Rs 18 Lacs.
Now in June 2015, which is after 15 years of starting the SIP, the invested amount of Rs 18 lacs has grown into a corpus of Rs 1.28 crores!
Not a small amount considering that just Rs 10,000 was invested every month. And to put it on record, we did nothing spectacular. We just did SIP. That’s it:
Rs 10,000 x 180 Months = Rs 1,28,00,000 (!)
Looks crazy? But that is the power of long term investing.
As a retail investor, you don’t need to be super intelligent or a financial wizard to create a big corpus. As Buffett famously said,
“Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.”
For retail investors, the rule of the game of wealth is simple:
Don’t do anything else apart from investing a small amount (as much as you can manage) every month for long periods (to know more, check the detailed SIP calculators).
In our case study, it’s about investing an amount of Rs 10,000 every month for a period of 15 Years.
Not a very difficult thing to do for quite a few of us. Isn’t it?
So if it is so easy to create wealth through a simple SIP, then why do people continuously talk about equities being risky and complain about losing money by investing in stocks and equity mutual funds?
Are the equity mutual funds really that risky? The answer is a big ‘No’.
It is not risky provided you play by the rules of the game. And to convince the sceptics, let us analyze the returns earned by the chosen mutual fund during different periods.
Since the investment is SIP-based, we calculated the XIRR returns over a different period. In our opinion, 7 years+ is a suitable time frame for investing in equity mutual funds.
However, we will calculate XIRR (or internal rate of return) for 3 years, 5 Years, 7 years, 10 years and 15 years.

Rolling 3-Year Returns

Please note that a period of 3 years is not a suitable time period for investing in equity funds.
An amount of Rs 10,000 was invested via SIP on 1st of every month for 3 years. So in 15 years, we get 13 data points on a rolling 3-year basis. The XIRR results are as follows:
Franklin India Prima 3 Year SIP
Out of the 13 available data points, not even once were the returns negative. The returns ranged from lows of 4.28% to highs of 48.45%.
9 of the 13 three-year periods gave returns in excess of 18% – which is not a small achievement.
4 of the 13 three-year periods gave single-digit returns ranging from 4.28% to 8.32%. No doubt, these figures are low. But there still hasn’t been a loss. Now let’s agree with one fact. In short time periods, bull and bear markets can significantly distort the returns. Both on the higher, as well as on the lower sides.
So let’s carry out a similar analysis for longer time-frames.

Rolling 5-Year Returns

Now 5 years is the bare minimum, which one should consider for investing in equity funds.
In this particular scenario, an investment of Rs 10,000 was made via SIP on 1st of each month in each of the 5-year periods. In a 15-year period, we get 10 data points on a rolling 5-year basis. The results are as follows:
Franklin India Prima 5 Year SIP
Once again, not even once did the returns turn negative. i.e. there were no loses. In fact, the returns ranged from lows of 8.71% to highs of 49.43%. It is worth noting that the minimum returns are quite close to risk-free (and most of the times taxable) returns provided by PPF and the ever-so-popular bank fixed deposits.
7 out of the 10 five-year periods gave returns in excess of 17%. There was just one single digit return period of 8.71%.
Let’s now move further.

Rolling 7-Year Returns

For a 7-year SIP, the return figures are as follows:
Franklin India Prima 7 Year SIP
The most important thing to observe here is that once again, there are no negative returns periods. And the returns range from lows of 9.54% to highs of 42.52%.
7 out of the 9 available periods gave returns in excess of 16%. The two lowest returns were 9.54% and 11.04%. And both these are well above the returns given by traditional bank deposits, PPFs, NSCs, etc.
Now, let’s move to 10-year period now.

Rolling 10-Year Returns

In this, we only get 6 rolling periods of 10 years each. The returns corresponding to each of these periods is given below:
Franklin India Prima 10 Year SIP
No losses. Lowest is 17.40%. Highest is 28.18%.
And all the six period have provided returns in excess of 15%.
It is worth understanding that these type of returns are the best among all available financial instruments like fixed deposits, PPFs, NSC, etc. And unless you were lucky in real estate, you could not have made such returns in any other asset class.
Now the interesting thing about these 10-year periods is that these started with a bear market in 2002 – 2003, which was then followed by mega bull-run of 2003-2007. Then came the crash of 2008-2009, which was then followed by the sideways move of 2009-2014. Since 2014, it’s been a practical bull market till June 2015. So most of the data points in 10-year periods have gone through a couple of bull and bear markets. Yet the returns have been positive and in fact, exceeded 15% in each of the periods.

Rolling 15-Year Returns

In a 15 year period, we just have one data point. And returns for this period of 2000-2015 are 23.25%.
Franklin India Prima 15 Year SIP
It can be safely said that over a 15-year period, none of the investments (excluding real estate in some specific areas) would have provided such returns. More importantly, such returns have been achieved by small monthly investments without straining your pocket or cash flows.
Now we know what you must be thinking.
Why was this particular fund chosen?
Or what would have happened had we taken any other fund?
Now as per Value Research, the scheme Franklin India Prima Plus Fund (Or Franklin India Equity Fund) is rated highly – as a 5 Star** Fund (at the time of writing this post originally). It ranks in top 3 in the Large & Midcap Equity Funds category* over a 5-year period. It is also among the top 3 funds over a 10 Year Period. To sum it up, it’s one of the best performing funds in its category over short, medium and long term.
* To know more about changes in mutual fund categories recently, read SEBI’s Mutual Fund Categorization and Rationalization changes in 2018.
So lets admit that we intentionally chose the best and the top rated fund in the Large & Mid Cap Category for the above study. Hence, all results were bound to be in our favor. Isn’t it?
No worries. Lets change the fund now. 🙂
What if we choose a fund that is one of the worst performing funds of its category?
That will be an interesting analysis.
So we take one of the worst performing funds – Sundaram Growth Fund and repeat our analysis.
As of June 2015, Sundaram Growth Fund has been rated as a 1-Star Fund, and ranked in bottom three of the Large & Midcap category over a 5-year period. It is also ranked last in all funds over a 10-year period.
So once again, lets analyse the power of SIP using the worst performing fund.
If you want, you can see the entire investment statement by clicking on the small image below:
Sundaram Growth Fund SIP
To summarize, a regular monthly investment of Rs. 10,000/- from July 2000 to June 2015 was done. This amounted to an actual investment of Rs 18 lacs.
Now in June 2015, which is after 15 years of starting the SIP, the invested amount of Rs 18 lacs had grown into a corpus of Rs 68.42 lacs!
So this has been achieved by a simple SIP in 15 years, when invested in one of the worst performing funds.
Comparatively, the best fund created a final corpus of Rs 1.28 crores. The total investment was the same in both the funds, i.e. Rs 18 lacs.
This divergence in returns highlights the importance of choosing the right fund and monitoring the same regularly for its performance.
Now lets proceed to our XIRR analysis for various time-periods.

Rolling 3-Year Returns

Below is the table giving the rolling 3 year returns in our chosen fund:
Sundaram Growth Fund 3 Year SIP
So while the best fund delivers returns between 4.28% and 48.45%, the not-so-great fund delivers returns between -0.44% to 47.10%.
Although, the best fund had no negative returns in any of the 3 year investment periods, this fund gives negative returns in 2 of the 13 data points.

Rolling 5-Year Returns

Sundaram Growth Fund 5 Year SIP
Out of the 10 data points, not even once the returns were negative. And we are talking about one of the worst funds here. 🙂
Lets move on to longer periods now.

Rolling 7-Year ReturnsSundaram Growth Fund 7 Year SIP

The returns in the 7-year period range from lows of 4.08% to highs of 37.72%. Compare this with the range of returns (9.54% to 42.52%) produced by the best performing fund.
7 out of the 9 data points for the best performing funds gave returns in excess of 16%. For the worst performing fund, only 4 out of the 9 data points provided returns in excess of 16%.
Now 2 out of 9 data points gave returns of 5.52 % and 4.08%. Though theoretically, it’s not a loss, it is still lower than what could have been earned through safer options like FDs, etc. In case of best performing fund, it did beat the fixed deposit returns even at its worst. So once again, it proves that fund selection is very important.

Rolling 10-Year ReturnsSundaram Growth Fund 10 Year SIP

No losses. Low of 9.21%. High of 24.03%.
Compare this with the returns given by the best fund – which had a low of 17.40% and a high of 28.18%. The best performing fund managed to give returns in excess of 15% in all 6 ten-year periods. The worst performing fund could manage it only twice.
Now comes the most important part.
Even though the returns of the worst performing funds were (obviously) lower than the best performing fund, the it were still higher than those given by other instrument like fixed deposit, NSCs, PPFs, etc.
Read the previous paragraph again to understand its importance.

Rolling 15-Year Returns

The story is similar for the 15-year period too. The chosen fund delivers return of 16.09%, which is way below 23.25% achieved by the best performing fund.
Sundaram Growth Fund 15 Year SIP
But even though the worst fund does poorly when compared to the best one, it is still not a bad performance, when compared to other safer options.

Conclusion

The above analysis shows that for the best fund in its category, there were no losses in any of the 3, 5, 7, 10 or 15-year periods. Even the worst performing fund managed to avoid losses in 5, 7, 10 and 15-year periods. Though there were minor losses in few of the 3-year periods.
But we need to remember that anything less than 5 years is not suitable for equity fund investing.
Now a very important point to understand here is that even though the difference in returns of two funds might not look large (23.5% – 16.09% = 7%), over a 15 year period, it can have a significant impact on the final corpus as shown in the table below:
Best Worst SIP Fund India
So which mutual funds you pick for portfolio does impact your final returns too.
Note about Sundaram Growth Fund: Between 2000 and 2005, this fund was an average performing fund and not counted among the good ones. Since 2006, this fund has not performed well and currently stands at the bottom of the large and mid-cap category.
Let’s now try to answer some questions (which readers might have) about SIP investing:

Frequently Asked Questions

Q – Why do most investors end up losing money or not getting decent returns from SIPs?

They do not follow the main rule of the game, i.e. keep investing an amount X every month for a period of 10 or more years. They try to time their entries and exits in markets instead of focusing on staying invested.
Once again, have a look at the complete investment tables for the 2 funds used in this analysis. Except for the initial years (up to 2 years), there was no time when the folio had come into a loss. Even during the 2008-2009 crisis, if one had been a regular investor, the high returns might have been lost, but the value of folio would still have been very decent in comparison to the money invested.
Q – What if I had entered the markets during the peak of 2008? I would have lost my money. Isn’t it?
On 1st January 2008, the NAV of Franklin India Prima Plus Fund (now Franklin India Equity Fund) was Rs 212. After the crash, the NAV was down to nearly Rs 98 by March 2009 (a fall of more than 50%). But it returned to Rs 220 by September 2010. So even though your folio was down in 2009, it must have been back to its original level by 2010. In addition, your regular SIP during 2009 would have allowed you to purchase units at cheaper NAVs, which would have given phenomenal returns by the end of 2010. Hence at a portfolio level, you would have done well.
You can check the rolling 3-year returns table in the post above (for Franklin India Prima Plus Fund). The returns are almost 19% to 21% for the periods between 2007-2010 and 2008-2011. So there would have been no loss even if you had entered at the 2008-peak and kept on investing as a regular dumb systematic investor.
I did not get the high returns from markets that people regularly talk about.
The market may or may not give high returns in the short term (spanning 1, 2 or 3 years). But there is data to prove that if one stays invested for periods of 5, 7 or 10 years in good mutual funds, returns easily beat those of traditional options like bank FDs.
What is that you want to say?
  • Equity mutual funds are the best available investment options to build wealth.
  • SIP is the best way to invest in equity mutual funds for common investors.
  • You don’t have to be a financial genius to build wealth.
  • You have to play as per the rule of the game i.e. keep investing an amount X every month for more than 10 years.
  • The markets will crash sharply, stay low, rise slowly, and run up fast. This is natural. But you can ride over it and make money only if you play according to the rule of the game.
Disclosure (Ajay): I am an individual investor sharing my personal experience. I have no interest in buying or selling any of the funds mentioned in the above analysis or otherwise. As an investor, readers need to do their own analysis or take help from investment advisors before making any investments. I am also a SIP and lumpsum investor in Franklin India Prima Plus Fund (now Franklin India Equity Fund) since 2006. I am not an investor in Sundaram Growth Fund.
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Written by Dev Ashish

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

21 comments

  1. Hi,

    Thanks for this case study. Makes it simple to understand it.

    I have a question – what if I invest in 10 year MF through SIP and make the monthly contributions religiously but the 10th year witnesses a market crash period like in 2008. Now since I decided this 10 year horizon to meet a financial need (say to meet the education fees of my child) and I have to withdraw the money irrespective of the market crash to meet my need but given the market has crashed (so would have my folio value )- would you still say that I got value for money? Don’t you think this is the flip side/risky side of investing in MF?

    I am still deciding to invest in MF and have this question stopping me to invest. Would appreciate your take on this.

    Thanks
    S

    1. Hi SA

      I get your point… We need to understand that every long term goal will eventually become a short term goal. 🙂

      So a goal that is 10 years away today is a long term goal – and should be invested accordingly (say via equity MFs).

      Now, after about 7 years – the goal would have become a short term one as only 3 years would be left for the actual fund requirement.

      At that point (to decide about fresh investments in next 3 years), you need to think like you are saving for a short term goal – which means taking less riskier options – like debt funds, RDs, FDs. As for the money that is already invested in equity MFs in last 7 years, that should be slowly moved out of equity MFs to safer instruments.

      This approach will not take care of all the risks but will work well under most circumstances.

      Hope that answer your question.

      1. Dear SA,

        Make sure you give at least a 5 to 7 Year period for the last SIP amount to grow.

        If you require money before this period, better invest in other avenues such as RD, Fixed etc., which provide guarantee to capital and returns.

  2. Wonderful work Ajay. Because your article i started learning about MF. I have small Query, instead of SIP investment, is there any way to Buy MF units when stock-market is down like buying stocks.
    in that case is there locking period or can i sell anytime like Stocks.
    In that case what % brokerage charges (My case ICICI Direct).

    Thanks in Advance.

    1. Hi Rajesh

      You can easily make lump sum investments in most MFs. Lock-in depends on individual funds (whether ELSS or not). As far as % brokerage is concerned, it can differ from one distributor to other. You can even make investments directly with the AMC through direct plans (where you won’t have to bear the cost of distributor/agent commission too)

  3. Nice article. I have a question about MF. Today i saw NAV of one of the fund dropped by 1.8%. During such time is it good idea to pump lump sum?

    Thank you

    1. 1.8% is not a big fall. But if the fund is a proven fund and expected to do decently well in future too, then you can think of lumpsum investments. But bigger question is – whether you need this fund in next 5-7 years or not.

  4. Hi Very useful article but how to figure out best day of month to pick up for SIP so that one do not end always buying at higher NAV .. Any suggestions. What are your thgoughts about MutualFunds india ? Are they better than ICICI And HDFC and other AMC ?

  5. Really commendable….Sir

    I have a query sir, as recommended by warren buffet, for a know nothing investor, one should choose to invest in Index fund………….sir please put some light into the matter……….I want to invest around 20,000 per month for more than 15 years and having moderate risk profile…….please help me out…..

    An early response is highly expected,

    Regards, Pankaj Sharma (M. No. 9654508919)

  6. I have been following posts interestingly . The most recent one is Ajay two part series. Hopes drained down and heart feared to put money in to MFs [my future plan]. Find this post immediately after reading those and my hopes evolved to blossoms like anything. Very nice depiction with real time examples of good and worst funds. Nicely illustrated and thanks much to dev and ajay for presenting this most valuable detailed cases to the public.

    i am uncertain before and now i am confident about MF investments . Looking forward to approach right guru for financial planning.

    One last concern / query though.

    How to differentiate good vs worst funds as those all seems like 1 when we opt to take . [ should i leave it to financial planner and follow him ] target corpus shouldnt be hindered with low return percentage right . If all funds are good as prima plus , then there is no question.

    An x unfortunate person opted Sundaram fund thinking it is best , but after 2 yr [ min monitoring period] he realized no movement in NAV and decided to switch to other fund [ is it wise to go for other good fund or to continue with it] please enlighten.

    Since 10/15/20 investment horizon is good for equities to cover losses [if any that might have occured] can anyone only choose equity based funds only in his portfolio in order to generate big corpus ?

    like

    Reliance Small cap/SBI Small cap –36%
    L&T Large-Midcap /HDFC Midcap –24%
    Mirae asset bluechip — 26%

    Kindly please advice.

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