We live in a day and age today where everything needs to be looked at through the prism of some data and numbers. My view on this has always been that if you fundamentally understand a concept then it does not really need the crutch of the numbers. However, I will make an exception for this post as there have been too many queries on it.
So let us look at my MF buying for one scheme this year and see how it has an impact on my overall financial situation. I will choose the DSP BR Micro cap fund. The following simple analysis will help us in seeing what has happened here.
- I have so far bought 1818 units in 2016 at an average price of 38.5 Rs.
- Had I continued in my normal SIP for 7 months of the year ( my earlier SIP on this was 10000 per month), the average price would have been 45 Rs. Note that this is a conservative estimate, in reality it is a little more.
- I would therefore had to invest 12000 Rs more in 2016 itself to get same units. Note that your asset is really the number of MF units you have in your account.
- If I was spending 70000 Rs in 2016, I would have got about 1555 units.
- Assuming that I let the extra 263 units be invested for the next 18 years @ 12 % XIRR the extra money I will get is equivalent to 1.1 lac. I have assumed the current price of 50 Rs in the DSP BR Micro cap fund.
So, there you have it – an investment of 7 months translates to a difference of 13000 Rs in a year and 1.1 Lac plus in 18 years even with a relatively conservative return expectation of 12 %. You can easily calculate the impact for a person who will be investing in MF for 25-30 years. At a conservative estimate again, the number will be in crores.
One can point out for argument’s sake that the impact is appearing more because I have been “lucky” with how the market tanked in Feb/March and recovered subsequently. But, if you think about it a little you will understand “luck” has nothing to do with the process.I would have bought my MF units based on the plan at the same time. Yes, the recovery has helped but that would have happened, some time or the other.
The simple reality is SIP is a completely illogical method to buy MF. Even if you want to buy every month, make sure you vary your amount so that you are able to take advantage of the opportunities that will present itself. Doing it blindly is simply like shooting blindly at a target and hoping you will hit it.