One of the investment lessons that gets bandied around when it comes to investing in the stock market is that stocks are for the long run. Of course, no one really gets around to tell you how long is the long run.
The BSE Sensex touched an all time high level of 21,919.79 points on March 7, 2014. As I write this it is at 21,942.11 points, which is higher than the all time high it touched on March 7. During the course of trading today (i.e. March 10, 2014), it even crossed 22,000 points briefly.
The question is what are the returns that the Sensex has generated. Between January 2, 2008 and March 7, 2014, the Sensex has given an absolute return of just 7.11%. Yes, just 7.10%, over a period greater than six years.
You, dear investor, would earned significantly better returns by just letting your money lie idle in a savings bank account which pays an interest of 4% per annum (or actually 2.8% if you come in the 30% tax bracket). If you had made the effort to move your money into a bank, like Yes Bank, which pays up to 7% interest on the money deposited in a savings bank account, you would have done even better. And these returns would have been guaranteed, unlike the returns from a stock market. So much for stocks being the right investment product for the long run.
The BSE Sensex is made up for 30 stocks listed on the Bombay Stock Exchange. And in the last six years the stocks that constitute the index have been changed majorly. Dhirendra Kumar of Value Research points out in a column that “ The Sensex has seen large changes since that time. Nine of the thirty companies have been replaced. It’s literally not the same Sensex any more.” And if one were to re-calculate the value of the Sensex assuming these stocks would have continued to be a part of the Sensex, the Sensex would have actually been at 20,400 points today, writes Kumar. This is close to around 6% lower than the March 7 high that the Sensex achieved. Also, this is not totally accurate given that one of the companies Satyam Computers, no longer exists.
So a buy and hold strategy on the Sensex does not really work. But does that mean you should not invest in the stock market? Should you stay away? Not at all.
The best way to invest in the stock market continues to be a systematic investment plan(SIP). If you would have started an SIP on the HDFC Equity Fund in January 2008 (which was one of the better funds back then) it would have given you a return of 12.96% per year, assuming had continued your SIP till date through the ups and downs of the stock market.
You would have done even better if you had started an SIP and invested regularly in ICICI Prudential Dynamic Fund. The returns in this case would have amounted to 14.43% per year. An SIP on DSP Black Rock Top 100 fund (which was also one of the better funds back then) would have earned you a return 9.54% per year, whichi is not as high as HDFC Equity Fund or ICICI Prudential Dynamic Fund, but not bad nonetheless.
Also, it is worth remembering that these returns are tax free. Any mode of investment giving a tax free return of 9% or higher, in these difficult times, is a pretty good bet.
Of course, most people would have missed out on these returns, given that they would have started to cancel their SIPs once the stock market started to fall in 2008, in the aftermath of the financial crisis. But what they forgot is the basic principle behind an SIP.
For SIPs to give good returns, the stock market needs to move both up and down. When the stock market goes down, then investors are able to buy a greater number of mutual fund units for the same amount of money. And these units bought when the markets are low, provide the kicker to the overall returns once the stock market rallies.
When it comes to mutual fund SIPs, it is best to remember the old Hero Honda advertisement. Fill it, shut it, forget it.
Discloure: Vivek Kaul is a writer. He tweets @kaul_vivek. He invested in all the mutual funds mentioned in the piece, through the SIP route, at some point of time.
The article originally appeared on www.FirstBiz.com on March 11, 2014