We have mentioned a number of times in our blog that systematic investing is the best approach in volatile markets for getting good long term returns. By investing through systematic investment plans (SIPs) in volatile markets, you can take advantage of volatility by means of Rupee Cost Averaging of purchase price.
The broader equity market in India has been quite volatile for more than last 12 months. Though we had a brief respite from volatility in the run up to Lok Sabha polls and after the results were announced, volatility returned to market and has somewhat intensified over the last one month. In our view, volatility will continue for some more time till we see improvements in macro data (e.g. GDP, IIP etc), corporate earnings growth and global risk sentiments. In such conditions, investing through SIP can yield excellent long term returns for investors. Investors who have investible lump sum funds can also invest through Systematic Transfer Plans (STP).
Suggested reading: Make Salary Day your mutual fund investment day
For this article, we have looked at the best performing SIPs infocused equity funds category over long investment periods 5 years, 7 years, 10 years etc. For SIPs, investors should have long investment tenures so that they can benefit from power of compounding over long tenures; over shorter tenures the power of compounding is limited. We looked at long term SIP performance in the focused funds category, SBI Focused Equity Fund clearly stood out as an outstanding performer. The table below shows the returns of Rs 5,000 monthly SIP in SBI Focused Equity Fund over different tenures and its rank in the category.
Source: Advisorkhoj Top Performing SIP
Clearly, over long investment tenures SBI Focused Equity Fund is one of the best SIP performers in its category. The chart below shows the annualized SIP returns of the scheme compared to different asset classes over different tenures.
Source: Advisorkhoj Benchmark Returns
We can draw several interesting and important conclusions from the chart above:-
- Over a long period of time, interest rates are declining in India. This is logical because as our economy grows in size and matures, interest rates will decline and investors have to be prepared for it.
- Gold, which is favoured asset class in many Indian families, has given low long term returns. Investors who think Gold is one of the best long term investments should re-think.
- Equity is the best asset class in the long term, particularly if you are investing from your regular savings, systematically or otherwise, as most Indian households do.
- SBI Focused Equity Fund has generated considerable amount of alpha for SIP investors over different long term investment tenures. Alpha is the excess returns over the market benchmark, which investors get by investing in a mutual fund scheme. Higher the alpha more is your wealth creation in the long term.
In our view performance consistency is an important attribute for good long term SIP returns because SIP investments over long periods of time are made at a different price points and market conditions. We have discussed a number of times in our blog that rolling returns is one of the best measures of performance consistency over long investment tenures.
The chart below shows the 5 year rolling returns of SBI Focused Equity Fund since inception of the scheme versus its benchmark index S&P BSE 500 TRI. You can see that the scheme consistently outperformed the benchmark.
Source: Advisorkhoj Rolling Returns
You can see that the average annualized 5 year rolling returns of SBI Focused Equity Fund was around 17%. Please note that SBI Focused Equity Fund was launched almost 15 years back and therefore, when we are calculating average 5 year rolling returns we have quite a large sample of rolling returns. Statistically speaking, averages from a large time series sample provides greater confidence of getting similar results in the future. However, investors should note that as the Indian equity market matures and becomes more efficient, scope of high alpha generation will gradually get more limited in the future.
Investors should not take historical returns as indicators of future returns. It should rather be taken in the context of relative performance versus other asset classes. Return consistency, in that regards, can provide useful insight to investors. In the table above, you can see that SBI Focused Equity Fund gave more than 8% CAGR returns nearly 87% of the times in the last 15 years. The long term historical average 10 year Government bond yield was around 8% - this was the typical investor expectation for fixed income assets, though the expectation should now be revised downwards as long term interest rates in our economy is on a lower trajectory, periods of interim volatility (higher yields) notwithstanding. Therefore, we can feel confident that SBI Focused Equity Fund over long investment tenures (5 years or longer) will give better returns than fixed income.
You can also see in the table above that SBI Focused Equity Fund gave more than 12% returns over 5 year investment tenures, nearly 75% of the times in the last 15 years. We think that 12% returns should be expectations from equity as an asset class in India, factoring in long term secular GDP growth potential and inflation expectations (please see our post, What is a reasonable rate of return from equity mutual funds). Though alphas may contract in the future, the long term rolling returns performance across different market conditions of SBI Focused Equity Fund shows considerable wealth creation potential for investors in the future.
Wealth creation by SBI Focused Equity Fund
The chart below shows the wealth accumulated through Rs 5,000 monthly SIP in Focused Equity Fund, Growth Option since the scheme’s inception. You can see that with a cumulative investment of Rs 8.9 lakhs you could have accumulated wealth of more than Rs 31 lakhs over the last 15 years through monthly SIP. The annualized SIP returns (XIRR) over the last 15 years was 15.56%.
Source: Advisorkhoj Research
About SBI Focused Equity Fund and conclusion
The scheme (formerly known as SBI Emerging Businesses Fund) was launched in October 2004 and has Rs 4,864 Crores of assets under management (AUM). The expense ratio of the scheme is 2.1%. Industry veteran R.Srinivasan is the fund manager of this scheme. Srinivasan has 26 years of experience and has been the managing the scheme for nearly 10 years.
Please read why this fund is the best performing Focused Fund in the last 3 years
The long continuity of the fund manager of this scheme, in our view, has enabled the scheme to deliver strong performance. This scheme is suitable for long term financial goals. We think that investors should have a minimum investment horizon of 5 years for this scheme. The risk profile of this scheme is moderately high; the scheme is suitable for investors with moderately high to high risk appetites. Investors should consult with their financial advisors if focused funds and particularly, SBI Focused Equity Fund is suitable for their investment needs.
Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.