Mutual funds give great returns

We have always talked about investing regularly in equity funds for the long term. And, when we say long term, we don't mean six or 12 months. We don't even mean two to three years.

We believe you will reap the benefits of investing regularly over a period of five years; 10 is even better.

To verify whether long term investing works, we ran through the performance figures of equity funds for the last 10 years and found that you would have earned very good returns in over half the funds if you had stayed with them that long.

What's more, if you had invested in a Systematic Investment Plan, you would have made even more money.

• How to invest in a mutual fund

The returns

We studied 34 mutual funds that have existed since July 1995 to June 2005.

The average point to point annual returns of these funds stand at 13.41%, compared to the Sensex return of 8.05% and Public Provident Fund return of 10.77%.

If you were a regular investor, investing the same amount every month in an SIP, the situation would be completely different.

Let's say you put in fixed amounts every month in the mutual funds. And you put in the same amount in PPF and the stock market.

You would have made an average of 20.37% in the former, compared to the Sensex return of 12.33% and PPF return of 10.29%.

• Too see the returns from all the 34 funds, click here.

Why we justify our stance

There are many issues that could make this conclusion weak.

1. The survivorship bias.

If the funds that failed or have performed poorly have gone out of business, then the set of funds we are left with is biased. But not too many funds have gone out of business, except for the close-ended funds (funds with a fixed tenure) whose term ended. The other close-ended funds have become open-ended (open for buying and selling of units all the year through with no fixed maturity term).

Hence, this is not an issue since the number of funds that could impact the average figure is small.

2. A few good performers may be skewing the average. That, too, is not the case here. There are nine funds that have provided returns between 20% and 30% a year over 10 years and 13 funds that have earned below 10%.

So, if there is a bias, it is the weaker funds that are affecting the average.

• How long must I stay invested in a mutual fund

How an SIP investor would score

The 10-year returns from SIP definitely outweigh the 10-year returns of a lump-sum investment.

Looking at the SIP numbers for the decade ended June 2005, it is very easy to say the mutual fund investor in most funds has made very decent returns.

No investor has lost money, not even in even the worst-performing fund.

• Why you should watch over your mutual fund

Does an SIP guarantee a good return?

When the analysis was done on the year ended June 2005, the Sensex was at an all-time high. Hence, it would result in a great performance.

However, without changing the start date, we analysed the results with the end period as June 2003 and June 2004.

The Sensex was at 4,795 points in June 2004. Over a nine year period, the investor would not have lost money.

The Sensex was at 3,607 points in June 2003. Over this eight year period, results are not that good.

Hence, the market conditions matter.

If you have invested in just 'any' mutual fund, you would need a bit of luck and market timing to have got a decent returns.

But if you have invested in one of the better funds, you would have done well.

• The best funds may not be the safest!

SIP returns

Here are the returns over the various years from some consistent performers, had you invested in an SIP.

8-year return as on June 30, 2003
9-year return as on June 30, 2004
10-year return as on June 30, 2005

• Top mutual funds in July '05

Picking a good performer

Funds like Alliance '95, Birla Advantage, Franklin India Bluechip, Franklin India Prima, Franklin India Prima Plus, HDFC Equity, HDFC Prudence and UTI Balanced have given great returns.

It is not that these funds have, at times, underperformed, but they have managed to overcome their poor results.

The Franklin funds were poor performers for the first three years since July 1995.

Alliance and Birla were good performers in the first few years and have become major underperformers in the past few years. But, due to their performance till 2000, these funds have remained good investments till date.

One indicator would be to look at how the funds are rated. Value Research rates the funds by giving them stars. You can use that as an indicator.

If a fund drops from the five-star category to the four-star one, put it on a watch list.

If it loses one more star, you may need to start thinking about switching to another fund.

Read How to compare mutual funds to understand this better.

You could stop your SIP in this fund and start a new SIP in a good fund.