how did intensifying sips lead to the economic boom? - october … · aditya birla sunlife...
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HOW DID INTENSIFYING SIPS LEAD TO THE ECONOMIC BOOM? Keerat Singh, The Shri Ram School, Moulsari
Email: [email protected] , [email protected]
Abstract-This paper examines how the
emergence of SIPS-Systematic Investment
Programmes-in India changed the Indian
investor (as a whole) and contributed to India’s
steady Economic development. Several Private
Banking Associates were interviewed to get a
broad picture on how the Economy has changed.
Furthermore, official data from Mutual Fund
firms, AMFI and NSE was reviewed to reach a
reasonable conclusion. The result shows that
SIPS are powerful tools in the world of
investment and there lies a strong correlation
between Investment awareness and number of
Portfolios being registered. The total number of
SIP accounts in India has grown at a speed and
is parallel to the flow in interest on the product.
In the past three years, the number of SIP
accounts increased from 68 lakhs to 1.45 crore
in June 2017.There has been a major change in
that, investors used to switch to gold or fixed
deposits if they saw underperformance of equity
funds. However, investors now days, are no
longer investing in gold or fixed deposits due to
unattractive and unhealthy returns. To add to
this AMFI data shows that the Rs.23 trillion
mutual fund industry has witnessed healthy
reduction in SIP discontinuation. The data
shows that investors discontinued 36% of new
SIPs in April 2017 as against 31% in December
2017.This paper highlights various factors that
has led to this rise in Portfolios and its impact on
the Indian Economy.
Keywords: SIP, Lumpsum, Equity,
Economical, Funds
Introduction The overall development of the Economy
mainly depends on financial situation
prevailing in that country. However, the true
cause of economic growth proves to be a
major jigsaw puzzle for economists even
today. In an attempt to solve a piece of this
Jigsaw puzzle that could be attributed to SIP
accounts aiding in a rise in the average
Indian’s wealth, this paper aims to analyse
how these accounts have contributed to growth
for the Indian economy. In a Country
like India the degree of depth and efficiency in
the provision of financial services depends on
several factors, all of which are to be taken
into consideration when measuring the impact
on of SIPS on growth. Mutual Funds have
become a widely popular and real approach for
investors to contribute in financial markets in
an easy, low-cost technique, while muting risk
characteristics by distributing the investment
across different types of securities, also known
as Diversification. Furthermore, the rise of
SIPS offered a uniqueness to investors. The
concept of rupee-cost averaging offered
investors to see a steady rise in their asset
value over a period, that perhaps proved to be
satisfying; However, there are other factors
that also
come into play. The first part of this paper will
aim to showcase a rough understanding of
portfolio architecture in many Mutual Fund
Investment houses, a change in the Indian
investor, Issues faced by Investment homes
and insight from investors and fund managers
themselves. While, the second part of this
paper will dwell on the overall impact on the
Indian economy while considering other
factors as well. This paper will aim to
incorporate a Macroeconomic analysis on
these Systematic Investment Programmes and
their effects on the growing Indian Economy.
I. Existing Scenario
Everyone is not committed to long term
investments. Many people want to make quick
returns after seeing past reigns. The past is
very different from the future and people do
not understand this. The biggest problem. is
that you need to educate the client where there
will be periods of overwhelming returns where
they need to be toned won instead. You cannot
have parabolic returns, but rather return
expectations need to be brought in line with
the market. Investors also do not like
committing for long term. They believe that
they have made short returns already, so they
pull out. Fund managers focus with the goal
gif not allowing anything to change in the
portfolio. This is a major problem. People who
invest for a long term, see that their
satisfaction is quite high. But people who
make changes to their portfolio frequently or
when they want to pull out money and notional
losses come into play. This is when they pull
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out money and stay happy as this notional loss
plays with human psychology. It ranges to the
issue of Myopia: where the human mind only
looks at what is right ahead rather than what
lies ahead in the future. Expectations need to
be matched. Every scheme has its managed
where they can only invest into some sector.
There is sector specific, stock specific limits
on the exposure that SEBI has put into place.
This is a security check where one fund
manager cannot go overboard in one defined
sector in any particular stock. Investor’s.
money don't disappear as the structure shows
that the trust is managed by the asset
management company where the money is
being managed in the trusts name. So, money
is being allowed to the investors share. There
have been a few rare cases, but none largely of
large significance. There are the basics such as
someone forging a signature etc.
II. Architecture
The foundation of the SIPS varies in terms of
the different schemes and the different
companies that introduce them. Each scheme
is largely structured on the premise of the
advantage of complete flexibility.
Additionally, these companies advise clients to
start with
perpetual SIPS-where the end date for your
investment withdrawal is blank. This is where
Asset allocation and sub Asset allocation
comes into play. Asset allocation and sub
Asset allocation is the process of segregating
portfolios into different classes such as large
stocks, bonds, commodities and cash
investment with the goal to reduce risk of
investment through diversification.
Diversification is important as most often, it
leads to a rise market capital. This
diversification takes place across large Cap
funds, MId cap fund, and small CAP funds
according the fund managers style of
investment. Another major factor that is taken
into consideration when framing a portfolio is
Investment horizon-total length of time that an
investor expects to hold a security or a
portfolio- where a minimum horizon of at least
Five years as required to survive the volatility
of the equity market, with the aim of staying
long term to ensure stable returns. Most fund
managers aim to align investor goals with the
fund horizon.
While the architecture of a Portfolio may
seem systematic, what is even more important
to understand is how the Indian investor has
evolved over time. As of 2004, not even a 100
Cr was invested in portfolios in India. Now as
of 2018, there is more than 5000 Cr being
invested in SIPS monthly. So, what really
brought this change? One reason is that ever
since the value of Gold fell, they were giving
low returns and so were all large fixed deposits
in India. Indian investors were left with no
choice but to turn to other alternatives. AMFI
seized the opportunity and started rigorous
awareness programs. Investors in India were
introduced to the world of mutual funds. Till
this date the economy was largely dependent
on FIIs, but the Indian economy then saw a
change, a shift to a more domestic plan where
money was starting to rise year by year.
Furthermore, many other characteristics of
investors contributed to this surge in
investments. Firstly, there is a constant desire
to beat inflation because SIPS allow investors
an alternative to investments in banks that
beaten away by inflation by instead offering
the option for a long-term inflation adjusted
growth. This aids in investors having a
significantly good purchasing power, which is
what has attracted most investors in the Indian
market. Secondly, proportionate to the rise in
awareness, most investors are now more
attracted to the idea of diversification-as
mentioned before-by mitigating when
spreading investments across different asset
classes by also appealing to a larger range of
investors. This has proven to be a game
changer for the Indian market where any
middle-class man could make an investment.
The later part of this essay will dwell on how
all of these factors have contributed to
economic growth.
III. Future Scope:
Four-five years back the concept of SIP had
started, but because the markets were very
unstable there was also these phenomena of
investor sort of stopping their SIPs in between.
I think investors are becoming more
developed, more intelligent and over the last
few years we have seen that in volatile times
in fact the intensity of SIPs increasing has
taken credence, so we do expect that in the
next one year to 18 months this number of Rs
4,000 crore will exceed a USD 1 billion a
month. also sheds light to some interesting
matter where the performance of Balanced
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funds is more consistent and positive
compared to Index funds.
CAGR - Lumpsum - Balanced Fund
1
Year
3
Years
5
Years
7
Years
10
Years
Aditya Birla SunLife
Balanced'95 Fund 25.52 12.2 17.26 13.27 11.12
CAGR - SIP - Balanced Fund
1
Year
3
Years
5
Years
7
Years
10
Years
Aditya Birla SunLife
Balanced'95 Fund 20.1 15.83 18.03 17.11 16.27
**Performance as on 1 Jan '18
Table 2: Comparison for Aditya Birla Fund
Taking Aditya Birla Sun Life Balanced’95
fund for example even though in the 1-year
benchmark the CAGR is 25.52, by the 10-year
benchmark it as at 11.2. Whereas the SIP
investment started at a 1-year benchmark of
20% CAGR and stayed relatively constant in
the following benchmarks, having its lowest
relative value in the 10-years benchmark of
16%, which is also a 4% drop attributed
perhaps to the performance of the market as a
whole. This highlights the fact that over a 10-
year time period for private funds, the SIP is
always the safer bet due to its stability and
consistency.
**Performance as on 1 Jan '18
Table 2: Comparison for all Private funds
Table 2 also shows that Private funds have a
much larger alpha or yield for SIP investments
or Lumpsum and investments than do Index
funds for either. In this case the index funds
are touching negatives as well, which in the
case of SIPS could be battled over long term.
However, as a Lumpsum investment, the
investor would have to face the burden and
consequences of the high-risk investments and
low returns.
IV. Advantage
The advantage with SIPS is that they’re
completely flexible, they advise clients to start
with perpetual SIPS. Asset allocation and sub
Asset allocation comes into play.
Diversification is important and market
capitalisation is important. This diversification
takes place across large Cap funds, MId cap
fund, and small CAP funds. According the
fund managers style of investment. Depends
on the type. Investment horizon is a major
factor where a minimum horizon of atlas 5
years as equity as an asset class is very volatile
with the goal of staying through the long term
and making good returns.
The max value is perpetual, but the
minimum is that you continue the SIP for 5
years. But if it’s a goal-based investment then
your goal needs to be aligned with the SIP.
Advantage of SIPS in mutual funds vs
other Asset classes-
The difference between a mutual fund SIP and
ULIP Sips. The biggest advantage is the cost
effectiveness. A ULIP based investment plan
comes with several costs that range from
premium allocation charges, fund management
charges, mortality charges. These charges can
range from 5-10%, whereas mutual funds have
a capping of 2.5% per annum on the atoll
expenses. In comparison to other asset classes
like PPF that gives you a fixed rate but he
returns potential is low as the fixed interest
rates are low due to government setting a fixed
rate. There lies the problem of fixed deposits
in PPFS.Therefore a mutual fund equity SIP is
better. There are also other asset classes where
you cannot have a SIP but you can take an
Emi’s and get charged monthly.
Below table describes the SIP
investment plan as per pro data and market
research carried by me through different
channel.
CAGR - Lumpsum - Balanced
Fund
1
Year
3
Years
5
Years
7
Years
10
Years
Aditya Birla SunLife
Balanced'95 Fund 25.52 12.2 17.26 13.27 11.12
HDFC Balanced
Fund 27.47 12.91 18.73 15.15 13.94
HDFC Prudence
Fund 27.56 11.83 16.6 13.14 12.31
ICICI Prudential
Balanced Advantage
Fund
18.89 10.91 14.2 13.16 9.88
Reliance Regular
Savings Fund -
Balanced
29.49 13.5 16.61 13 12.4
CAGR - SIP - Balanced Fund
1
Year
3
Years
5
Years
7
Years
10
Years
Aditya Birla SunLife
Balanced'95 Fund 20.1 15.83 18.03 17.11 16.27
HDFC Balanced
Fund 22.4 17.23 19.54 18.41 18.05
HDFC Prudence
Fund 21.88 17.43 18.63 17.18 17
ICICI Prudential
Balanced Advantage
Fund
16.41 12.87 14.3 14.73 14.34
Reliance Regular
Savings Fund -
Balanced
22.8 16.8 18.4 17.33 16.58
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CAGR - SIP
1 Year 3 Years 5 Years 7 Years 10 Years
1000000 1134689.8 1368478.1 1338701.5 1329229.8
1149358.69 1146946.8 1395604.6 1360054.3 1300965.7
1150387.843 1147468.4 1389228.1 1357489.9 1343653.4
1206576.494 1315901.7 1716671.7 1669741.8 1692453.8
1131124.944 1179139.8 1446374.7 1473450.8 1622685.7
1161890.27 1166802.1 1484334.7 1484854.7 1760846
1167113.326 1283178.7 1762500.5 1696479 1616270.7
1138430.618 1203572.9 1585842 1618433 1796825.6
1192232.611 1224673 1865618.2 1916842.6 1843334.1
1215499.509 1323567.7 2029735 2188038.2 2500467.4
1256168.216 1333385.4 1964607.9 2194463.3 1628209.3
1206863.134 1362089.8 2011455.1 2044553.3 2107724.5
1208067.893 1349665 2017919 2004455.6 N.A
1204229.05 1301548.6 1831682 1788489.6 1864956.4
1116051.916 1175905.5 1705560.9 1836761.8 2190328.6
**Performance as on 1st Jan'18
Note: It is assumed that Total Investment amount is INR 10 Lacs
across all time period
Fig 1: CAGR – Systematic Investment Plan
The data in fig 1 shows a comparison in a
fixed investment of 10 lakhs in different funds
over different times. The calculation used to
calculate the performance/value is the
Compounded Annual Growth Rate, which
shows at the rate at which an investment gives
returns
CAGR - Lumpsum
1 Year 3 Years 5 Years 7 Years 10 Years
1287500 1277642 1778133 1722731 1708144
1299500 1302886 1836736 1770142 1644475
1301400 1303960 1822952 1764440 1740804
1402200 1648468 2533223 2471700 2558589
1265500 1369110 1946619 2024351 2391363
1322500 1343745 2028908 2050115 2723922
1332000 1581982 2632557 2533161 2376066
1279200 1419277 2249244 2354063 2811408
1377000 1462522 2855589 3042786 2924975
1417700 1664007 3208699 3674031 4569860
1486700 1683885 3068886 3689006 2404546
1402700 1741861 3169501 3339759 3579178
1404800 1716792 3183366 3246438 N.A
1398100 1619337 2782273 2745366 2977947
1236900 1362463 2509125 2857062 3786012
**Performance as on 1st Jan'18
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Note: It is assumed that Total Investment amount is INR 10 Lacs
across all time period
Fig 2: CAGR – Lump sum
The two tables show a difference in
value/performance of the investments in Lump
sum-the method of making a onetime
investment in SIPS-in comparison to a
Systematic Investment Plan. The data is in
direct support of what this paper aims to
highlight. Taking the Franklin India Bluechip
Fund for example, it can be seen that in an SIP
plan performance for the One year and Three-
year mark are fairly similar and in
concordance to the growth rate. The
performance at the One Year and Three-Year
mark giving a return of 11,31,124.94 and
11,79,139.79 respectively, showing the
similarities in the performance of the INR 10
lakhs investment. The moment the investment
reaches a Five-Year benchmark, the returns on
the investment rise to 14,46,374.66 in
concordance to high CAGR of 15.43 in that
time period. In the Seven-year benchmark, the
CAGR drops to 14.57 and the market is not
performing too well so the returns on the
investment were 14,73,450.80. However, as
soon as the investment reaches the Ten-year
benchmark, the returns rise to 16,22,685.71
even though the CAGR is 14.24. This is due to
the concept of rupee cost averaging that SIPS
account for. Because the investors
continuously invested at times when the
economy was not doing as well, the returns at
the end of the Ten-Year benchmark show a
stable rise from the original investment. The
returns account for rises in inflation as well.
The investor has invested with discipline at
regular time periods, so at times when the
economy is not doing so well like the 10-year
benchmark, his investments are averaging out
his costs and his end returns are high. In
contrast is the Lump sum investment, where
investments are made at one date. The
advantage of a Lumpsum investment is that at
times when the market is doing well, you can
make high returns. However, that is only if the
market is doing well and there is no guarantee.
Taking Franklin India Bluechip Fund for
example over here as well, there exists that
sense of volatility with a Lumpsum
investment. In the Three-year benchmark, the
value of the 10 Lakh Investment rose to a
value of 13,69,110.05 lakhs in conjunction to a
drop in CAGR of 11.04. What is interesting to
note is that for the Lumpsum investment, does
not rise as much as expected due to the CAGR.
There lies the issue with Lumpsum
investments-there exists a sense of volatility.
Taking the 5-year benchmark for example
where the CAGR rose to 14.25 from the
previous benchmark (3 years) of 11.04.
however, the rise for this large 3% increase
was only 600,000. This is perhaps due to the
fact that even though the growth rate for the
investment was high at that point, the market
itself was not performing so well. To add to
this, the inflation needs to be considered in
Lumpsum investments as well thereby further
reducing the actual value
V. Results
Calculation Matrices
Absolute return = (current NAV - initial
NAV)/ initial NAV x 100
Simple annualized return
Some may want to annualize the return
generated when holding period is less than 12
months. Also referred to as effective annual
yield, it is extrapolating the returns but not
giving the true picture. If you need to
annualize the returns, here's the formula:
((1 + Absolute Rate of Return) ^ (365/number
of days)) - 1
Illustration: The NAV of Rs 20 may shoot to
Rs 25 in, say, 7 months, i.e., 210 days. The
absolute return in this case is 25 per cent over
7 months, i.e., 0.25
So it becomes
= ((1 + 0.25) ^ (365/210)) - 1
=47.38 per cent
Compounded annual growth rate (CAGR)
CAGR =(((ending-value/beginning-value)
^(1/number-of-years))-1*100
Illustration: Assuming you had invested Rs 1
lakh in an MF three years back at a NAV of Rs
20. Now, the NAV is Rs 40.
So it will be
= (((40/20)^(1/3))-1)*100
And on hitting enter, the result is:
=25.99%
VI. Conclusion
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In Conclusion, as shown through the course of
this paper. There are several factors, which
contribute in making SIPS an attractive
method of investment. It is this lacking
inflation, concept of rupee cost averaging and
consistent returns that aid in making the SIP
model attractive. While other methods of
investment do have their benefits, it is the
elimination of the risk factor that makes the
SIPS a model that appeals to all financial
classes in India. This Architecture allows fund
managers to guide Investors for a period of
more than 55 years so that their profits and
losses are averaged over a period. Lastly, it is
also the customer (the investor) who has
played a major role in the success of the SIP
with regards to helping the Indian Economy
reach its boom state. A patient investor is
always the dream and with a rise in wealth
classes, there has been a rise in these investors
in India. With an array of Funds to choose
from, the Indian investor is doing better as is
the Economy.
References
1. http://cafemutual.com/news/industry/1269
2-sip-inflow-increases-by-53-in-fy-2017-
18
2. http://cafemutual.com/news/industry/1221
3-80-sips-have-a-ticket-size-of-less-than-
rs5000
3. http://cafemutual.com/news/industry/1191
6-industry-sees-reduction-in-sip-
discontinuation
4. http://cafemutual.com/news/industry/1188
5-six-out-of-10-sips-are-active-for-over-5-
years
5. https://economictimes.indiatimes.com/new
s/economy/indicators/india-fastest-
growing-economy-at-7-4-per-cent-in-
2018-imf/articleshow/64089078.cms
6. https://economictimes.indiatimes.com/mf/
analysis/a-five-minute-guide-to-sip-or-
systematic-investment-
plan/articleshow/60372408.cms
7. https://economictimes.indiatimes.com/ind
ustry/transportation/shipping-/-
transport/indian-ships-lose-share-in-
countrys-overseas-trade-
survey/articleshow/60023483.cms
Mr. Keerat Singh is a student in the 12th
Grade student, who
researches in his free
time. After taking several
online courses and researching on Mutual
Funds, I have gained the insight as to how to
SIPS operate. To enhance my knowledge on
the broad subject, have Financial Operations
interned with one of India’s leading Fund
Houses and the Financial Department to
understand the broad dynamics of Financial
derivatives and equity finance. As a student, i
am studying Economics at a Higher Level in
the IB Diploma and this has aided in my
evolving interest in the subject. I hope to study
it a higher level in college as I feel it will
provide me with answers to feed my curious
nature.
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