SIP success is less about timing, more about time

It’s for a reason they call, compound interest, an eight wonder. Everyone agrees with the result but only a few fathoms the process. It’s omnipresent in nature, in ourselves, the power of compounding on how we hone our skills, how we better at many things we take for granted including running, learning, etc. which we manage over time. Time is thus a defining feature in our lives and so is in investing.

Even when we spell the formula for compounding, we say, ‘to the power of’, where we transfer the power to time, which we possibly have control while concentrating in trying to manipulate the returns, which are arguably the least in our control. So, when people complain that they’ve not seen returns in the short run, I sometimes am forced to bluntly ask if they or their kids began walking from the day they were born.

So, when SIP (Systematic Investment Plan) is marketed often as a simple, piece-meal and low-stressed method of building wealth in equity markets over the long-run, the invariable question people shot back is - how long? While answers could feel subjective, there’s enough research to bring some realistic perspective from the past data. Though, past performance isn’t an assurance of the future returns, as disclaimed by the mutual funds (MF), still could offer a peek into what future could rhyme if not repeat.

A little over two-decade study of rolling returns from Apr 2005 to Aug 2026, offers a data driven unambiguous answer to this question. The findings show that the longer the SIP runs, the higher it neutralizes the market volatility and market timing even as the shorter tenures leave investors exposed to significant market volatility.

Let’s look at the evidence on the shorter tenure SIPs. Checking the 2-year SIPs, the sharing of rolling returns is striking with about 25% for the NIFTY Smallcap 250 TRI, about 19% for the NIFTY Midcap 150 TRI and about 14% on a relatively stable NIFTY 50 TRI. In simple words, an investor starting a 2-year SIP in smallcap stocks had roughly a one-in-four chances of ending up with a loss.

However, this risk declines slowly as the tenure lengthens. By 3 years, negative return instances drop to around 22% for smallcaps, 11-12% for midcaps and 6% to the large ones. By 5 years, the numbers fall further to single digit across all three categories of indices. By 7 years, the negative returns become a rarity: under 5% for the smallcaps while it’s closer to null for the other two indices. What’s interesting is that this pattern is consistent. Time in the market steadily erodes the probability of loss, regardless of which segment of the market an investor chooses.

It’s not just the instances of negative returns that improve with longevity but even the severity of the losses. The minimum returns on the SIP reflect how bad the worst-case scenarios could translate to. For a 2-year SIP, the worst outcomes are negative: about -39% for NIFTY 50, -53% for Midcap 150 and about -57% for the Smallcap 250 indices. These losses are substantial and could offset an investor’s financial goals materially. But by the 3 years, the worst-case outcomes improve but remain painful ranging from -26% to -36% depending on the index. Things emerge better over 5 years, with minimum returns cluster in mild negative band of about -5% to -9% across the indices. And by 7 years, the broader index of NIFTY 50 records a minimum rolling return of just 0.4%, implying that even the unluckiest SIP investor in the large-cap space wouldn’t have lost money, making it a powerful argument for extending investment horizons.

The longer tenures don’t just stop at mitigating the risk, i.e., the downside, but turn crucial in generating higher consistent average returns. Comparing 5-, 7- and 10-year average rolling returns show relative stability across categories. NIFTY 50 averages about 12.5 and 12.7%, NIFTY Midcap 150 TRI around 17.3 and 17.7% while NIFTY Smallcap 250 TRI about 14.8 and 15.5%, reinforcing the idea that patience converts market volatility into predictable compounding growth.

The industry participants wrestle with timing the market or time spent in the market. The results indicate a definitive tilt towards time or timing. When compared for 10-year SIP started in every calander year from 2006 to 2016 on three scenarios of starting at: the year’s high (the worst possible timing), the first trading day of the year, and at the year’s low (possibly the best timing); the results converge more than most investors would expect.

Regardless of the timing, for the NIFTY 50 TRI, returns ranged narrowly between 12.6 and 12.9%, 18 to 18.1% for NIFTY Midcap 150 TRI, and the NIFTY Smallcap 250 TRI ranged between 15.3 and 15.7%. Over the 10-year period, the difference between the worst and best possible timing was less than 50bps (basis points) in every case. This is probably the single most reassuring finding for SIP investors to not worry about when to start investing.

While I just enumerated the benefits of staying invested, another question haunts the SIP investors: what if I stop SIP in between? For instance, a 20K SIP invested at an average return of 10%, takes about 17 years to accumulate a corpus of 1Cr. However, the consequence of pausing the contribution could delay the goal accomplishment. Continuing the same example, if the SIP is stopped for 6 months after 2years of contribution, the goal is deferred by nearly 5 months i.e., 4 months and 27 days to be exact. The damage is similar even if the interruption is at later stages of the journey. A 6-month break after 4 years still costs about 4 months and 3 days while a 12-month break would impede the goal achievement by 8 months.

Thus, data suggests that short tenure SIPs (of 2-3yr) are susceptible to both higher probability of negative returns and potentially severe losses particularly in mid- and small-caps. As the investment horizon extends, both the frequency and severity of losses diminish sharply while average returns stabilize, across the segments. This reduces the investor behavior (fickleness/timing) though inconsistency could hurt (pauses) by disproportionate delays in goal achievement. SIPs thus counterweigh the human emotions and bring patience and consistency to the reward investors. As Malcom Gladwell said, “practice isn’t the thing you do once you’re good. It’s the thing you do that makes you good.” (The author is a partner with “Wealocity Analytics”, a SEBI registered Research Analyst firm and could be reached at [email protected])

ABOUT THE AUTHOR

K Naresh Kumar

K Naresh Kumar[email protected]