Investing is indeed a curious game. Most investors enter the market in the hope that they will be able to make good profits. However, there would be hardly a single investor who has not experienced a loss in the market. Even though an average investor knows that long term equity would give good returns, the pain of even a notional loss is just too much to bear. If only there was someone who could tell an investor exactly when investments would turn positive!
Shorter SIP periods equal higher probability of losses:
According to certain studies, SIPs in a diversified equity fund for one year would put you at a 22.5 percent chance of incurring a loss. Two-year SIPs, however, carry the probability of just 16.2 percent of the same happening. As you go on increasing this time horizon, the probability of losses comes down considerably. For five years, the probability of loss is just 3.3 percent, and for 10 years, just 0.3 percent! This is almost equal to the probability of making no loss.
But why does this happen? Bear markets in India typically last for around 12 to 24 months at a time. Thus, a three-year SIP allows for enough time to the market to not only bottom out but to also get back to its starting point. By the fourth year, the bull phase is usually ongoing, which allows investments to increase.
Longer SIP periods equal higher chances of double-digit returns
It is safe to say that one does not invest in equity funds to avoid losses, but rather to gain a double-digit return. So what are the chances of getting to a 10 percent annual return with a SIP? As per studies, a SIP of one year gives you a 55.6% chance of getting more than 10% returns. For SIPs that last for two years, the figure grows to 56.9%; for five years, it stands at 63.8%. And for a 10-year SIP, there is a 77.3% chance of getting a 10 percent annualized return.
Extend your investment horizon if you catch a market peak
If an investor kicks off his or her SIP at the worst possible time, which is the market peak, chances of loss are the highest in the first year. However, within the next three years, he/she would have broken even and begun to make at least some money. This then implies that those investors who have a 10 or 15-year horizon do not need to worry about getting their starting point right. However, if one starts in a bullish market, they would then have to be willing to wait for five years or more to make a reasonable return.
Even a SIP cannot help you if you invested badly
If you chose a SIP which is poorly performing, even stretching the tenure of your SIP will not help or bolster your returns. In fact, sticking to a poorly performing SIP is actually a big opportunity cost that you need to consider. Mediocre funds have often disappointed investors, which is why it is important to regularly keep monitoring and reviewing your funds.