Are SIPs risk-free form of investment?

Here’s whether SIPs are risk-free form of investment or not?:

Are SIPs risk-free form of investment?

Systematic Investment Plans (SIPs) have been regarded as the best mode of investment in mutual funds. It gives you the benefit of averaging and compounding. This strategy is suggested by financial advisors especially in the case of highly volatile equity mutual funds.

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Averaging implies a reduction in per unit cost of investment. It happens via a simple phenomenon. As you might be aware, the stock market keeps going up and down. SIPs made on a continuing basis would help you to take advantage of buying more units during bearish markets.

The power of compounding would speedily enable wealth accumulation. It occurs as the returns earned on SIP are reinvested in the scheme. So, the returns in itself become a powerful income-generating asset.

In addition to this, SIPs help in moderating your investment behaviour. As every month a part of your saving is invested into the scheme, it inculcates the habit of saving and disciplined investing.

Those who have just started their career, SIP makes them active on investing by making it very practical rather than postponing it till they accumulate bigger savings. It’s a way to bring more and more passive savers into the mainstream investing.

When you don’t possess the knowledge of investing, SIP helps you to stay invested and composed throughout the booms and depression. It takes away the difficult decision-making of when to enter and when to exit the market.

These benefits are oft repeated things among the investor fraternity. But one aspect which is seldom discussed is “Whether SIPs can help to check investment risk or not?” Most of the investors believe that just because they are doing SIPs, their fund value would stay intact.

Also read: Risk vs volatility: Here’s the difference

Investors perceive SIPs to be immune from market risks. It means that whether the stock market is bearish or bullish, fund value remains unaffected and keeps growing. In other words, it means that according to investors there is no correlation between stock market movements and returns of equity mutual funds.

Let me bust the misconception surrounding the SIPs as being risk-free.

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Stock Market Movements and SIP: The inseparables

There’s a simple logic behind doing SIP over a lump sum. Instead of playing one-time larger stake, you play smaller continued bets over a specified period. SIP is yet another method of investment which is feasible for the small investor.

Before diving into the turbulent waters, you need to understand this fundamental relationship. The Equity fund manager uses your SIP to purchase equity shares of companies according to scheme objective.

Share prices of these companies keep fluctuating according to the performance of the companies. Whenever the prices of underlying stocks of the scheme rise, the fund NAV automatically shoots. On the contrary, the fund NAV falls because of fall in the prices of underlying stocks.

Now, the extent of fluctuation in the fund NAV can be analysed depends upon the type of stock holdings. The volatility of small/mid cap fund is higher as compared to large-cap fund. It’s because large-cap fund invests in stocks of companies which have stable earnings and large capital base. Hence, in the case of bearish markets, these are efficient in arresting the downside risk.

Conversely, small-cap funds are vulnerable to large losses in fund NAV. It’s because these funds invest in companies having variable earnings and smaller capital base. So, these are less-efficient in checking the erosion in prices upon bear runs.

Now, ascertaining the volatility or the risk inherent in a fund isn’t a rocket science. The fact sheet explicitly mentions some valuable ratios which will give a peep into stability and reliability of fund earnings.

You may use Standard Deviation and Beta along with R-squared to assess the risk profile of the fund. R-squared will indicate how much the fund’s movement coincides with the market movements. R-squared coupled with Beta gives a better look into fund risk analysis.

A mutual fund which has a high R-squared and high beta is a highly risky bet. It means that fund movements are highly correlated to market movements. Moreover, the fund would lose greater value than the benchmark in case of a downturn.

Given below is the impact of Sensex movements on the returns of Birla Sun Life Advantage Fund:

Situation 1: Rise and Fall of Markets (Jan 2006-Dec 2008)

Are SIPs risk-free form of investment?

It was a roller-coaster ride beginning from January 2006 which ended in December 2008. The stock market rally had started way back in the month of January 2006. There was an element of optimism everywhere. The investors perceived the bull to be unstoppable.

Simultaneously the mutual funds were also yielding high-returns in line with the rallying Sensex. An SIP of Rs 1000 started on 1 Jan 2006 had become Rs 39268.90 on 1 January 2008. During the same time Sensex too was at its peak at 21,206.77.

Afterwards began the market downturn. The Sensex kept slipping beyond investors’ expectations to touch its lows at 8467.43 in December 2008. Behaving in conformity, the NAV of Birla Sun Life Advantage Fund slid to Rs 22323.10.

Those who started SIPs in January 2006 and immediately stopped in December 2008, exited with a huge negative return of -22.64%.

Situation 2: Fall and Rise of Markets (Jan 2008-Dec 2010)

Are SIPs risk-free form of investment?

The Sensex started a healthy recovery from the advent of January 2008. During the tenure from 2008 to 2010, markets reached the peak of 21206.77 in the month of January 2008. This rally continued until the end of September 2008.

Afterwards, there was a bullish period for a short while from October 2008 to March 2009. From a mutual fund perspective, it becomes an excellent opportunity to accumulate more units at a lower price instead of redemption.

An SIP of Rs 1000 started on 1 Jan 2008 had become Rs 8000 in September 2008. During the same time Sensex too was at its peak at 21,206.77.

Birla Sun Life Advantage Fund showed its resilience during the lean period between Oct 2008 and March 2009. Although the markets fell in the interim period, the NAV of the fund kept rising throughout.

Again the markets picked up the speed and bull runs continued from April 2009 to December 2010. Those who had invested in mutual funds during this tenure made an absolute return of as high as 40.47% and an SIP return of about 21.16%.

Situation 3: Constant Fall of Markets (Jan 2015-Dec 2016)

Are SIPs risk-free form of investment?

Sensex made its southward journey throughout the period beginning from January 2015 to December 2016. It was at its lowest in February 2016 at 22494.61. Some developments took place during this tenure including the landmark ruling of demonetization.

Birla Sun Life Advantage Fund, being a multicap fund, was flexible enough to arrest the downside risk. However, it too experienced a dip in February 2016 in line with the dip of Sensex.

An SIP of Rs 1000 started on 1 Jan 2015 had reduced to Rs 11202.90 on 29 February 2016 after touching the peak Rs 12774 on 4 January 2016. The period of constant fall ended with an SIP value of Rs 14032 on 31 December 2016.

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Those who had invested in the fund earned a below average absolute return of 5.15%. The SIP returns of 4.79% were equivalent to saving bank account returns.

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Final Words

Now you know that SIPs aren’t as risk-free as you perceived before. But that shouldn’t deter you from investing. Instead, you can work on risk management. Always engage in goal-based investing. Rebalance your portfolio to keep returns in line with the expectations.

The time of entry and exit is very crucial. The longer you stay invested in equity mutual funds, the higher you score. The jitters of the short-term tend to smoothen out to give you higher returns over the long term; say more than 10 years. is an award winning personal finance platform. It helps you aggregate all your personal finance accounts like FD, Equity, Mutual Funds, PPF EPF, NPS including, Credit Cards & Loans etc. It's one place where you can track, plan and invest seamlessly. empowers you to invest in zero commission direct plans of mutual funds thereby helping you generate higher on investments. The best part is it comes with a lifetime Free plan.

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