Earlier, we discussed returns on a systematic investment plan (SIP) on an index ETF (To SIP an ETF or Not?) The analysis was incomplete because it did not discuss returns on a similar investment made on a risk-free asset. How would a recurring deposit over the same period of time perform?
To simplify, lets have a look at the overnight rates on our zero-coupon yield curve:
We can use these rates as a rough approximation for 1 month risk-free returns. What would returns be if an investor put in a fixed amount every month and re-invested it based on the risk-free yield above?
Since 2011: 9.66%
Since 2012: 10.25%
Since 2013: 11.98%
Compare this to SIP on ETF returns:
Since 2011: 7.40%
Since 2012: 8.58%
Since 2013: 5.33%
Three years worth of data points are too short to draw any conclusions. And unfortunately we don’t have yield curves before 2011, so we’ll take the 1-Month Mumbai Interbank rates as a proxy.
Recurring Deposit
| Start Year (Jan) | IRR |
|---|---|
| 2004 | 7.87% |
| 2005 | 8.03% |
| 2006 | 8.18% |
| 2007 | 8.33% |
| 2008 | 8.54% |
| 2009 | 8.90% |
| 2010 | 9.49% |
| 2011 | 9.86% |
| 2012 | 10.13% |
| 2013 | 11.19% |
SIP on the JUNIORBEES ETF
| 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% |
It looks like right up till 2009, the market outperformed the risk-free rate. And then took a turn for the worse and is yet to recover. Better days ahead, hopefully.
Update from Prakash Lekkala:
we will be taxed 30% on fixed deposit returns… so considering that, dollar cost averaging did better than FD, except in 2010 and 2013.
Bond MF’s would have done better since 2010, as you wouldn’t have paid tax after indentation