Are mutual fund houses making money using SIP hype ?

POSTED BY Mitra. A ON October 22, 2014 12:06 pm COMMENTS (12)

Can anyone please confirm the statements below. I have found this calculations and ROI of Equity in one of the post in JagoInvestor, and I didn’t see anyone rejecting the calculation part? Are we accepting the ROI calculations of Equity as mentioned below:.

1. Equity actual CAGR as on date has been only 12.5%. (Check Nifty levels since 2004).
2. MF companies deduct 2.25% AMC every year, so actual CAGR is only 10.25% for the customers.
3. If you deduct annual inflation of avg 7.5% per year, then NET RETURNS from Equity will be only 2.75%.
4. Equity CAGR is directly connected to GDP growth which was >6% in the past 10 years however with the current political scenario, GDP growth will remain <6% and so equity CAGR will be lesser, in the range of 9-10% which is VERY POOR considering the risks involved.

I am confused. Then why there is so much SIP hype ? Are MF houses making money through this Hype Cycle ?

12 replies on this article “Are mutual fund houses making money using SIP hype ?”

  1. SIVA PRASAD RAVIRALA says:

    Investor will not always get positive return in equity. It is for longterm only. In shortterm you may get loss. So, SIP always generate positive return over the longterm is not misconception.

  2. rahul123 says:

    Another nice article, please read.

    Very few people from market will give this advice.

    SIP – Systematic but not safe investment plan (http://www.moneycontrol.com/master_your_money/stocks_news_consumption.php?autono=738808).

    Common misconceptions about SIPs
    Misconception: SIPs generate higher return than lump sum investment
    Truth: As explained earlier, this is just a misconnection disseminated by vested interests like mutual funds and their distributors. SIP can be as good or as bad as lump sum – in all depends on which market condition you are in.

    Misconception: SIPs always generate positive return over the long term
    Truth: There can be nothing further away from truth. This statement is made under the assumption that equity markets always go up over the long term. If for whatever reasons equity markets don’t go up over the long term then there is no way in which SIP would be able to generate positive return. And if equity markets indeed always go up over the long term, then whether SIP or lump sum or any other method, the investor will always get positive return.

    Misconception: SIP would always give positive return because of “rupee cost averaging”
    Truth: This is a stupid statement. Rupee cost averaging can work in the investor’s favour or against him, depending on which market condition it is. If it’s a bull market then rupee cost averaging actually works against the investor and vice versa.

  3. Mitra. A says:

    To all JI members, Admins – Can you please evaluate these statements and calculations?

    1. Equity actual CAGR as on date has been only 12.5%. (Check Nifty levels since 2004).
    2. MF companies deduct 2.25% AMC every year, so actual CAGR is only 10.25% for the customers.
    3. If you deduct annual inflation of avg 7.5% per year, then NET RETURNS from Equity will be only 2.75%.
    4. Equity CAGR is directly connected to GDP growth which was >6% in the past 10 years however with the current political scenario, GDP growth will remain <6% and so equity CAGR will be lesser, in the range of 9-10% which is VERY POOR considering the risks involved.

    As I haven't seen anyone disagreeing the calculations. If this is the case – then why every Financial Planners, All Financial Planner's Groups, Media are exploiting SIP Hype in Equity ?

    1. santy221 says:

      1. Yes. 12.5% if invested only in Index. But in the mean time, you have accrued all the dividends over the last 10 years. Doesn’t that at least add another 2-3 % points?

      2. 2.25% is for actively managed MF. If you are comparing index fund, it is only 0.5 – 0.75% in most cases. So add 2-3% dividend income and subtract 0.75% in expense ratio. So you get 14% as just index return. Is that not amazing returns on your investment?

      3. Net returns will vary depending on inflation. It doesn’t matters which mode of investment you choose. There is no other easy and hassle free way to invest your money in other channels and hence the hype for equity.

      4. This is pure guess work to predict GDP. I am not an economist and I believe neither you are. Any evaluation needs to be in comparison with other options available. If you see other options are better, go ahead.

      1. santy221 says:

        Mitra, I rechecked the calculations and returns from Sensex is close to 16%. Not sure where you got the 12.5%. If you consider 16% and add all the dividends, then actual returns are mind boggling.

        Check your calculations again.

  4. rahul123 says:

    Hi,

    Your doubts are valid. One more point i would like to add is that, the moment you invest in MF you are losing safe 4% return from saving account. People ignore this opportunity cost.

    I asked similar question on this forum some time back

    (https://www.jagoinvestor.com/forum/why-should-retail-investor-trust-indian-equitycommodity-market). I will request you to please read it.

    I always believe, in India fixed income gives handsome return. The only hyped question here is to “beat inflation”. Simply solution is to put extra money, e.g. if you plan to put Rs 100 in FD@ 9%, put 105 in FD @ 9%. You will earn good return without any high fund management fee 🙂 – Note i am not considering the tax implications out of this transaction.

    1. Personally, i choose PPF & EPF (along with voluntary contribution) – around RS 3,50,000 per year) – i know there is a reinvestment risk and i might not get more than current 8.7% rate of return in future.

    2. Also i believe in future healthcare cost if going to rise hence i am investing in only pharma MF. I am ok if i loose all my money in this.

    Invest in MF if you are convinced about the sector/scheme and are willing to pay high fee and ready to loose money.

    Relying on MF for future cash requirement is not a good option.

    You are right, SIP is over hyped by financial analyst and business channels.

    Thanks,
    Rahul

    1. santy221 says:

      From the earlier thread, I see that you are not convinced of equities or MF. So why have you changed stance for only Pharma? Do you see only health care cost going up? What was the data which made you choose Pharma MF?

      Why not Realty MF? are Infra projects not being rolled out big time?
      Why not FMCG MF? Do you not believe more and more people will buy into organized FMCG goods?
      Why not Auto MF? Do you not believe that more people will buy/ upgrade cars?
      Why not Energy MF? Do you believe that oil prices will stay at the same forever? There wont be any energy crunch?
      Why not IT MF? Do you not believe that computerization will be rolled out to all sectors and depts?

      1. rahul123 says:

        Deat Santy221,

        Equity is very important asset class, but it is not for everybody!

        As mentioned in earlier thread, i am continuing my investment in Fixed income product to accumulate some descent amount over next 5-7 years. Once i secure my future and get rid of home loan then i can think of investing in other sectors (equity).

        Regarding your question of why Pharma MF? The answer to this is simple, i can see that in future i am getting directly affected with rising cost of medicine,the impact of increase of cost in other sector will not be very acute for me- again this is my perception. One need to be highly convinced about the sector/schemes for investment and should ready to loose his/her investment. I am ok, if this happens to my investment in pharma MF. If you are strongly convinced about the sector in which you want to invest, then go ahead. After all market works because of difference of opinion.

        My aim is to get positive return, more than 4% (which i am getting on my savings account), i am not expecting 10-15% of CAGR. Also, this has not aimed at specific goal, i am ok with 100% loss.

        My rationale for selection of pharma sector:
        When i used to work in Gurgaon, i often visit Varanasi. Most of the time, in my train i was surrounded by old people. After dinner, many of them used to take lot of medicine. In future India’s young population is going to be old and will need some medical treatment. Hence it is ever green sector.

        Early start is not always good. If i would have invested in 2006 (starting of my career) i would have lost heavily (even after current rally). Invest in equity/MF only if you got decent corpus and taken care of most of the financial goals.
        If your MF don’t give good return then analyst will say, your choice of fund was wrong.

        SIP in MF will only help in recurring savings (investment), returns are not promised. And, hence i believe if somebody invest in MF for retirement/child’s future, need to think again before the commitment in MF.

        Thanks,
        Rahul

        1. santy221 says:

          So, your investment in Pharma is not based on data which you had requested everyone else to justify equity. It is also not based on any facts. It is based on seeing young people.

          Equity is definitely not meant for people who see and invest. It is for people who are willing to learn and invest.

          Even in FD, people can invest in fly by night operators like Saradha , Sahara, GTB or hundreds of co-op banks or finance companies which have run off. You don’t invest in them but you choose to invest prudently in Banks or Bonds by highly rated companies.

          Same logic goes to MF as well. You don’t invest in any MF which gets launched but the ones which have good track record. Tell me one MF which has good track record which has its growth NAV lesser than 2006.

          I agree that equity is not suitable for you because you don’t see reason.

          1. rahul123 says:

            I am very strongly convinced about pharma hence i am investing in it (and at the same time ready to lose all my investment).

            I am not saying equity is not for me It is for everybody, be wise, secure your future, get rid of your loans. built some descent corpus then do what ever with left over amount (learn/lose, make more than 12-15% etc).

            Don’t rely stupidly on promised 12-15% return.

            If you want to be fool and keep on learning all your life, keep investing stupidly (without securing your future) without realizing risk in it.

            If you believe no proof is required, if you don’t no proof is enough.

            Thanks,
            Rahul

            1. santy221 says:

              Ok. So only if someone else suggests equity, you need proof. But if you decide without any data, then proof is not required.

              I see your point. Thanks!

              If you keep learning all your life, I can assure you that you cannot be a fool.

            2. rahul123 says:

              You are not getting the main point.

              If someone suggest that investing in equity via SIP will give 12% return year on year, then that is not right. My aim is getting more than 4% in Pharma MF and i know the risk (i will be investing for next 5 years). There is no data to back this assumption. I know this is gambling and i am ok with it.

              I am not suggesting anybody to invest in Pharma MF for so called long term and get 12%.

              Also you don’t have data to prove the point made my original author. Any of your financial valuation model will not justify the current prices for many stocks. Stop fooling people by giving advice to invest in MF (without taking care of other financial goals).

              Keep on learning all your life to know the ultimate truth (i.e. equity is not for everybody, you invest in equity once you secure your future with descent corpus as per your need).

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