Why SIP investing for 20 years may not have a multiplier effect

We have been loaded with the virtues of systematic investing via contemporary financial literature and industry experts. A cursory examination would indicate most of this associated literature is just about a decade old. The data, however, is quite compelling.A modest investment of ₹10,000 in SIP (systematic investment plan) mode would make you ₹1 crore in 20 years and a whopping ₹7 crore in 35 years (compound annual growth rate or CAGR assumed at 12%). That’s getting close to a dollar millionaire. The thought of creating ₹7 crore from a mere ₹21 lakh of your principal investment is very tempting. What could go wrong with this?As we shall see, this analysis is flawed at many levels. Let’s unpack.Passive investing strategyIt appears so sensible and easy in theory. But a lot of good luck has to fall in place for this passive strategy to work. This article delves into the micro aspects that indicate why the wisdom that looks so obvious today was not so obvious in the earlier moment in time. Why could your predecessors not benefit from this so-called SIP formulae to make money? After all, making money this way wasn’t that hard. Or was it?A prominent mutual fund still markets its popular scheme with these numbers. Had you invested just ₹10,000 under SIP in XYZ mutual fund starting 1997, you would have garnered ₹9 crore by 2022. However, the puzzling part of the story is this — very few, if any, actually benefit from this. Even if a few who did buy into the fund in 1997, they most certainly did not stay for 25 years to get ₹9 crore. Else, the fund would have carried out their story on the front page. But such individuals probably don’t exist.I wonder, if the said fund was multiplying money so fast, why didn’t the investors jump on the ship earlier, say after five years since launch? It should have sold out like hot cakes. Just like some of the small-cap funds stopped accepting money now.If you are confused, then it is only fair. You are falling into a few psychological traps that financial companies play with. The first one of these is the nominal returns trap. medium nocaptionhttps://youtu.be/OCl-z-IXXEE?si=sVlnOSmBgqSUAhpVNominal returns trapYou might see a ₹10,000 investment like child’s play in today’s money. But in 1997, it was a lot.Consider this reference from a Business Today article in 1998 about salaries at top business schools. “Between 1994 and 1995, the average monthly pay packet on campuses soared from ₹8,583 to ₹12,333, a rise of 49%.” Imagine a compensation of ₹12,000 per month for a top MBA graduate. Since most of these jobs were in top metros, there was little left to save beyond ₹2,000 per month. And that was a lot.Talk of middle-management salaries for someone in their mid-30s or 40s, you would find modest numbers again. The Business Today article says, “Compared to the 1997-98 levels, the average annual salary of middle managers is at ₹6.4 lakh annually for the upper rung and ₹4.67 lakh annually for the lower rung.” That comes to an average monthly salary of ₹40,000. Take out living expenses and there is hardly ₹10,000 left. You think this executive would go ahead and initiate a small-cap fund SIP with this money?And this is for the people earning at the top 1% of their respective age brackets. This is the crème of the cream. What about the rest? It is easy to arrive at a big number when you start with one. You can now see the nominal returns trap a bit more clearly.Fancy some national-level numbers. The Union Budget was ₹2 lakh crore in 1998. The GDP itself was ₹13 lakh crore. So, the central government was then spending 15.3% of GDP, almost similar to what it is spending today. Compare that to the ₹46 lakh crore spending at current times with a GDP of ₹295 lakh crore, the government spending comes to the same 15.5% of GDP. It is not that the government spending has risen significantly. But inflation has changed the numbers.Nobody has gotten richer. The nominal value of money has changed. And you don’t get rich on the rise of nominal money. It is the real increase of wealth that counts.Indexed to inflation, having an SIP of ₹10,000 per month in 1995 (inception of Nifty) is like investing in an SIP of ₹70,000 today. Ah… really, that much? Suddenly, it doesn’t look that easy now. medium113249243Recency bias trapConsidering the facts above, you now know that an SIP of ₹10,000 was not child’s play in 1997. But still, a few savers could have tried that. At least a ₹5,000 SIP in the said mutual fund. Why didn’t the savers not invest in SIPs in a big way earlier? What took them so long to realise the merits of such a powerful tool, you think?Transport yourself to 1997 now. An investor would love to capitalise on the markets. The mutual fund distributor pitches him the virtues of long-term investing and how the “India story” is shaping up. Yes, that’s true. Some of the current readers may be surprised to hear this but there was an India story even then. It has been there all the time.You are about to sign the papers. But you ask for past returns CAGR for Nifty and the fund performance. The broker is not very keen to pull out that underwhelming chart hidden somewhere in the back of his files. You insist.Here is what it looks like. The past three years’ Nifty returns (1994-97) are exactly zero. Nifty was launched in 1994 at 1,000 and by 1998, it was back at 1,000 after a few attempts to 1,150 or so. The fund performance, even worse. Well, do you want to make that SIP now?Remember, this is 1997. Fixed deposit rates were 12% or more depending on the bank. Who would be crazy enough to buy mutual funds! Markets are not for me, you say. Well, that explains why you don’t come across people who bought those funds in 1997 and even less who stayed. Conventional wisdom was not in favour of the markets then. Past performance didn’t support any optimism.And that also explains why conventional wisdom is against fixed deposits today and supports the markets. But have three years of negative market returns and then we can talk. medium nocaptionhttps://youtu.be/q0yoAYWpVVY?si=hllCP8zNoEM4qFkPThe final cutHistorical challenges seem easier if they are viewed from today’s lens. And almost everyone from the past appears foolish in light of what you know today. Recency bias and nominal return traps can distort your perception of future returns. Every generation has faced these issues. It is unlikely that this one does any better. In fact, all indications suggest otherwise.Since inception, Nifty returns have been 30x in 30 years. It looks impressive. However, simply adjusting for inflation, the index would have been at 7,000 on a nominal basis today. So, the real returns are just 3x of the original level, a stark contrast from the nominal returns at 30x. Back-of-the-envelope calculations show the real returns CAGR on Nifty since inception comes to 4.5%.Believe it or not, this is very impressive. And unlikely to be repeated. I have discussed why in my first article in decadal returns in Indian markets. We will be very lucky if we can get even 4% real returns in the next 25 years.Retrospective analysis can be helpful but has limitations. You can’t pick great investment ideas with retro analysis. If you do, you can’t be sure they will succeed. In most cases, they won’t. Else, investing becomes too easy like a math formulae. And everyone would be a great investor. If only.