Driving to work is an ordeal: traffic snarls, loud horns, a two-wheeler grazing my car’s side-view mirrors and a delayed entry into office. Last week I happened to leave home 15 minutes earlier than usual. Miraculously, driving was a pleasure. There was traffic on the roads, and auto rickshaws performing acrobatics too; but I seemed oblivious to it. It took me some time to realize that because I had left enough time to reach my destination, I was less stressed and I made it on time to my office, even whistling as I walked in. That’s possibly what happens to investors who start executing their plans early, I thought.
Back Testing the past 5 years
We see mutual fund advertisements screaming out of billboards and newspapers boasting of their performance over the recent and not-so-recent past. I tied a blindfold to the short-term returns, as I know that equity investing is for the long-term; and viewed their returns over the past 5 years. I could calculate and then salivate at the notional gains I would have made had I invested in the index (using the Nifty for comparison) then: had I put in Rs. 3 lakh five years ago, my investments would be worth Rs. 7.16 lakh, or a return of 19% p.a., compounded annually. I brought myself to reality quickly as I realized that I would not have had that amount to invest at one go in 2005.
Let the past not haunt you
The possibility that I could have made a profit of over Rs. 4 lakh in the past five years continued to haunt me. Some quick calculations later it dawned on me that I could have easily kept aside Rs. 5000 per month during that time, and Rs. 3 lakh would have been in my piggy-bank. Obviously, since not all the money was put in upfront, my absolute returns would be lower. Had I invested a regular amount in the Nifty on a monthly basis, my returns in the past 5 years would be a healthy 13.7% p.a. on a compounded basis. That would have resulted in my investment growing to Rs. 4.27 lakh today, or an absolute return in excess of 40%. Then I found a mutual fund statement (can’t tell you whether it was mine – confidential!) where Rs. 5000 per month was invested in a systematic investment plan for the past 5 years in a large cap fund.
Returns yes; Peace of Mind, definitely
I was thrilled to see the results (see Table). The value of this investment was Rs. 5.44 lakh, or a return of over 80% in past 5 years. Moreover, these returns were achieved with a total peace of mind – once the systematic investment plan was started, it went on without a pause and irrespective of market movements. It was then that I turned to the mutual fund fact sheet for this scheme and the results for systematic investment of the same amount of Rs. 5000 in the past 10 years blew me away. In this case, the total invested amount would have been Rs. 6 lakh and the fund value was over Rs. 41 lakh. Now I would have settled for this any time.
Lessons That I Learnt
What this taught me was: start investing early, stick to equities for the long-term, continue your systematic investment plan -- come thick or thin. Make sure you start driving to office early and watch your productivity soar. Investments follow pretty much the same rules.
Monthly SIP Amount:
Large Cap Fund Value