Though long-term investment in SIPs is usually vouched for its ‘magical’ returns, the definition of long-term can vary widely. Is it 3 years, 5 years, or perhaps even 10 years? The answer is not always straightforward
When it comes to investing in equities, the mantra "stay invested for the long term" is often emphasised by experts. But what exactly does "long-term" mean, especially when you're investing systematically through a Systematic Investment Plan (SIP)? This question is crucial for investors who are looking to maximise their returns while minimising risks.
Since equities are known for their volatility, this is where SIPs come in handy. By investing a fixed amount regularly, investors can average out the cost of their investments over time, reducing the impact of market fluctuations. But the success of this strategy hinges on one crucial factor, i.e., ‘time’.
Though the long-term investment in SIPs is usually vouched for its ‘magical’ returns, the definition of long-term can vary widely. Is it 3 years, 5 years, or perhaps even 10 years? The answer is not always straightforward. A report by Geojit titled ' Perceptions & Perspectives of SIP – A Study on SIP investing' presents data on SIP rolling returns in the Sensex from September 1996 to July 2024. The data underscores how long-term investment in SIPs across various time frames generates varying chances of profitability.
Analysing SIP Returns: What Data Shows
| SIP Rolling Returns in Sensex (Sep 1996 till Jul 2024) | ||||
| Frequency: Monthly | SIP Dates: 1st, 5th, 10th, 15th, 20th, 25th & Month end | ||||
| SIP Period | % Max | % Min | % Average | % Median |
| 3 Yrs | 58.9 | -29 | 15.8 | 14.7 |
| 5 Yrs | 50.6 | -12.1 | 15.2 | 13.7 |
| 7 Yrs | 41.7 | 0.5 | 16.2 | 14.4 |
| 10 Yrs | 30 | 4.1 | 15.6 | 14.3 |
| 15 Yrs | 18.4 | 7 | 14.3 | 14.3 |
| 20 Yrs | 16.4 | 11.4 | 14.6 | 14.7 |
| % = SIP CAGR | ||||
| Data: Geojit Report |
| % Probability of Positive Returns & above few Hurdle rates | ||||||
| Return Range | 3 Yrs | 5 Yrs | 7 Yrs | 10 Yrs | 15 Yrs | 20 Yrs |
| % times < 0% | 13.7% | 8.7% | 0% | 0% | 0% | 0% |
| % times > 0% | 86.3% | 91.3% | 100% | 100% | 100% | 100% |
| % times > 7% | 75% | 83.2% | 97.1% | 99% | 99.9% | 100% |
| % times > 10% | 66.4% | 74.1% | 80.8% | 93.5% | 97.2% | 100% |
| % times > 12% | 59.6% | 60.7% | 69.6% | 78.6% | 91.8% | 99.6% |
| % times > 14% | 52.1% | 48.3% | 53.2% | 53.2% | 54.7% | 75% |
| % times > Avg | 45.4% | 41.3% | 33.9% | 33.7% | 51.1% | 54.3% |
| SIP CAGR as of last SIP date of each observation |
The data on SIP rolling returns across different time frames, 3 years, 5 years, 7 years, 10 years, 15 years, and 20 years shows the potential outcomes of investing systematically in equities.
The probability of making a profit in a 3-year SIP is 86.3 per cent, with a median return of 14.7 per cent. However, there is still a 13.7 per cent chance of incurring a loss, with the minimum return being as low as -29 per cent.
For a 5-year SIP, the probability of positive returns increases to 91.3 per cent, and the median return slightly drops to 13.7 per cent. The worst-case scenario shows a minimum return of -12.1 per cent.
The probability of earning positive returns in a 7-year SIP rises to 100 per cent, with a median return of 14.4 per cent. The minimum return is 0.5 per cent.
A 10-year SIP also has a 100 per cent probability of positive returns, with the median return slightly lower at 14.3 per cent. The worst return in this period stands at 4.1 per cent.
When the investment horizon extends to 15 years, the median return stabilises around 14.3 per cent, with the worst return being 7 per cent. Interestingly, the data shows that the chance of incurring a loss drops to 0 per cent, making the safest bet.
For a 20-year SIP, the median return marginally improves to 14.7 per cent, with the worst-case scenario yielding a return of 11.4 per cent. The probability of earning more than 14 per cent also stands at a respectable 75 per cent.
Based on this data, one could say that the ideal long-term period for SIPs in equities starts from 7 to 8 years. Investing for this duration seems to eliminate the risk of negative returns, ensuring a 100 per cent probability of positive outcomes. Moreover, the chances of earning returns above common hurdle rates (7%, 10%, 12%, and 14%) also improve significantly as the investment period extends.
- 7 to 10 Years: A period of 7 to 10 years offers a robust balance between risk and reward. The minimum returns are consistently above 0, and the probability of earning more than 12 per cent is between 53.20 per cent and 78.6 per cent.
- 15 to 20 Years: For those who can afford to stay invested for 15 to 20 years, the chances of earning returns above 14 per cent are strong, with the worst-case scenario still yielding positive returns above 7 per cent or even 10 per cent.
The data strongly supports the idea that the longer you stay invested through SIPs, the better your chances of earning higher returns. While short-term investments carry the risk of negative returns, extending your investment horizon to 7 years or more significantly mitigates this risk and enhances the probability of achieving substantial gains. For investors looking to harness the full potential of equities through SIPs, a commitment to a long-term strategy, ideally spanning 7 to 20 years, can likely be the key to financial success.