SIP: Duration is the key to returns

Prakash Patil
/ Categories: Trending, Markets

If you think all SIPs taken for any duration of time are good, think again. It has been observed by numerous research studies that SIPs over a longer duration of time have fared much better than SIPs for a shorter duration. In fact, the returns on short duration SIPs have been negative many a time. But since ‘long’ and ‘short’ are relative terms, the question that would vex an investor’s mind is: which duration could be called as ‘short’ and which would‘long’. Or, more appropriately, which duration would be rewarding and which would be not.
  
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ow, considering that stock market cycles last for an average of about three years, it would be good to assume that the ‘long’ duration would be three years or more. Assuming that assumption is true, duration of less than three years could be considered as ‘short’. It has been observed that the shorter the duration of SIP, the higher the probability of negative returns, and the longer the duration of SIP, the probability of positive returns increases manifold. This is because over the longer period of say 5-7 years, one reaps the maximum benefit of the rupee cost of averaging as the good times and the bad times get averaged out.

On the other hand, in the case of SIP for 1-2 years, the risk of loss of capital increases manifold if the investor happens to catch the market cycle on the downturn. (Conversely, if the investor catches the market cycle on the upturn, the gain would be highest too).

So, if you have received a lump sum amount in the form of a bonus, prize, retirement pay-out, etc. it would not be a good idea to spread out the money over a period of two or three years when you can invest the entire sum at one go. This can be more rewarding as the entire amount starts earning returns right from the day one. On the other hand, if the SIP is debited directly from your bank account every month after you receive your salary, it makes sense as the investment is done when you receive your salary each month.

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