When bond fund SIP beats equity fund SIP…

Amit TrivediRecently, I received a message on social media. It compared the SIP returns between an equity fund and a debt fund over the last three years. It is an interesting case study, which should help us understand how to look at numbers.We have taken two different mutual fund schemes from the same fund house. Both funds invest in different asset categories – one is a pure equity fund, whereas the other is a debt fund. The performance of both schemes between January 1, 2014 to December 1, 2016 was as under:It is evident from the above that the equity fund has outperformed the debt fund over this period. Based on the above information, if one were to guess which fund would be a better choice for an SIP, most would pick up the equity fund. However, during the same period, the SIP returns were very different from expected. Look at the table below:The scheme that showed point-to-point returns of 16.86% exhibits SIP returns of 9.29% whereas the scheme where the point-to-point returns were 13.90% exhibits much higher 15.35% returns in case of SIP.How did this happen? Is there something wrong in the data? Or is it just a trick? As someone has aptly put it, “There are three types of lies – lies, damn lies and statistics”.Well, in order to understand what has happened, it is important to understand how SIP works. Read about it here.After you have read the article, have a look at the following chart showing the NAV movement of both the schemes over the period in question. (For the purpose of better comparison, we have changed the base value to a uniform Rs. 100 in both the cases. All the other NAVs have been adjusted accordingly. As you can see, the NAV movement in the last three months is vastly different for both the schemes. While the NAV of Dynamic bond fund has gone up, that of Frontline Equity fund has gone down. This means, the value of all the units accumulated so far moved together – up in case of Dynamic Bond Fund and down in case of Frontline Equity Fund. Very often, people select schemes for SIP by looking at point-to-point returns. In the above case, at least, they would be disappointed. The scheme that shows higher point-to-point returns exhibits lower SIP returns and vice versa.This can happen and it is not unusual. Having said this, there is one very important lesson from the above: whatever your mode of investing – lump sum or SIP, please reduce your equity exposure when you reach closer to the goal. It would not be prudent to be at the mercy of equity markets when your goal is just round the corner.Invest wisely.Disclaimer: The two schemes have been taken only for the purpose of discussion. This article should not be considered as recommendation for investment.- Amit TrivediThe author runs Karmayog Knowledge Academy. The views expressed are his personal opinions.