Hundred Percent Guaranteed Return

For quite sometime, fund managers in unison claim that the singular important reason for one to be invested in equity is that historically they have provided around 17% CAGR without at the same time telling you that the data for the starting years (especially from 1979 to 1986) is highly suspect. Debashis Basu of Moneylifers had written a wonderful article for the Business Standard and if you have not read it, I urge you to (Link).

Advisers on the other hand never stop preaching about the benefits of investing in Mutual Funds via a Systematic Investment Plan (SIP for short). The other day, in a discussion about SIP (Investment in MF) vs EMI (Housing Loan), the discussion veered to how SIP’s were for on a average 2 years while EMI’s ran for a minimum (avg) of 15 years or more.

But do long term investing in Mutual Funds (via SIP) assure you of Profits? The data from India is pretty small to use for longer term analysis. On the other hand, we have data in US which goes back for more than a Century. so rather than use Sensex data, I shall use Dow to provide you with some estimates.

Why Dow would be the question you would like to ask (other than having a larger data set). We all having our country bias, would love for India to move in the way US has moved from a developing country to not just a developed country but one with a consitution and politics similar to India (of course, we follow a West Minister model, but I hope you get the point).

Long term country forecasting is tough, rather Impossible I would say. When India attained its Independence, we could be clubbed with a lot of other countries which had similar GDP / Capita, GDP Growth, etc. 68 years fast forward, many have gone so far way ahead that one really wonders if we could ever catch up with them.

Even as late as the beginning of the 70’s, you could have easily pointed out to China and India being near equals. Once again, passage of time has meant that India has been left way behind in the growth race and catching up with China will be a herculean task if there was one.

I am looking at only posiitve’s and not negative’s like many a country in Africa / Middle East which were way superior to us at one point of time just to see the whole country ripped apart (Iraq / Libya / Rhodesia among others being the prominent members of that club). Even Russia went through a painful process in the 90’s and seems like its on the way back there unless it can really change itself.

Indian’s love Gold and Real Estate much to the dismay of fund managers and advisers who claim that these are assets that will not beat market returns even though in last 50 years, anyone and nearly everyone who has invested in Real Estate would have come out head over heels when compared to any other asset classes. The reason for the love (at least in case of Real Estate) has more to do with Recency Bias. You know that the property that your Grandfather bought has appreciated by XXX% and your father bought has also appreciated significantly. It hence becomes no brainer that one buys property not just with the hope of appreciation but also with the knowledge of it being as safe asset that will yield a income or allow one to live Independently (the number of persons with Second homes is really small & is a real minority anyways).

Mutual funds in India (at least a few of them) have been able to beat the markets but with markets getting more mature, will mutual funds be able to sustain such performance?

In US, over the last 10 years nearly 80% of Large Cap funds has not been able to beat their Benchmark. In the future, I would think that we too will more and more mimic such performance rather than being able to beat the benchmark head over heels.

So, coming to back SIP, have you ever asked a Advisor as to how much time he will have to invest to be completely guaranteed of the fact that the value of the investment will be greater than the Investment itself? As I wrote in my previous post, there is a pretty big possibility (I used Sensex data for the calculation) that the investment could still be under water.

But since data for Indian markets is fairly small, I wanted to see how long it would have taken for a SIP (data is from Yahoo and adjusted for Dividends) on the Dow to be guaranteed of success. The results surprised me. Do note that data starts from around 1880 and is till date and hence accommodates the two world wars, the Great Depression, the countless other bear markets. In other words, this market has gone through everything that we can think of as happening over the next 50 years

So, before further ado, Ladies and Gentlemen,

Based on above data, you will have to have invested over 40 years to be sure to eliminate even the minutest possibility of a loss. I agree, this is really the worst case scenario, but something that not too many even know off, forget keeping in mind when allocating capital to Equities via either a ETF or Mutual Fund.

Not knowing the future, decisions taken now can in hindsight look either as Genius (Real Estate (historical) falls into this category) or plain dumb (failed attempt at starting business). When investing, it hence becomes a key that you have all the possible info on hand before allocating funds for no one knows how the future pans out and while its not important to look like Geniuses, its also important that we do not end up looking like abject failures.

And everything begins with one starting to ask the Right Questions.