The two holy grails of investing: dollar cost averaging and low-cost investing come together if you systematically invest in an index ETF. We took a look at returns on doing an SIP on JUNIORBEES, an ETF that tracks the Junior Nifty index, that was introduced in 2003.
Summary of Returns
| Start Year (Jan) | IRR |
|---|---|
| 2004 | 10.77% |
| 2005 | 9.48% |
| 2006 | 8.66% |
| 2007 | 8.47% |
| 2008 | 9.81% |
| 2009 | 8.70% |
| 2010 | 4.91% |
| 2011 | 7.40% |
| 2012 | 8.58% |
| 2013 | 5.33% |
The experiment
The question we set out to answer was: What would typical returns be if you systematically invested in a low-cost index ETF over different periods of time?
So we assume that the investor buys Rs. 5,000 worth of JUNIORBEES at the closing price on the last day of each month. We accumulate the units, the cost basis and the P&L over different periods of time, starting at 2004 and moving forward in one-year increments.
The dollar cost averaging ensures that you buy more ETF units when the index goes down and less of it when it trades higher. And by tracking the IRR we ensure that we normalize returns for the investment period.
Conclusion
We expected nominal returns to be higher than what we observed. Between 2004 and 2014, inflation was often running in double digits. So even a 10% IRR would actually be negative real returns. Investors probably would have made better returns if they had kept the money in a bank fixed deposit instead. So from a purely returns perspective, an SIP on an index ETF doesn’t make sense.
Caveat: Just because the real returns were negative with this approach in the past, doesn’t mean that it will be so in the future.