Stock Analysis, IPO, Mutual Funds, Bonds & More
Tune in now for Wealth news, views & cues
ET Wealth Wisdom Ep 23 (ET Online)

Myth or fact? SIPs make equity investing risk-free

04:20 Min | September 17, 2019, 5:18 PM IST
In this week's ET Wealth Wisdom podcast, we discuss whether SIPs are actually risk-free.
You know we did that podcast on the Sensex hitting 40K and how mutual fund investors haven't been able reap the benefits fully?

Yes, what about it?

Well… there is some more bad news for mutual fund investors.. this time for those investing via the systematic investment plans or SIP route..

What are you getting at?

Well.. tell me this.. what is the first thing that comes to mind when you think of mutual fund SIP?

That they are practically risk free and should be used for investing for the long term..

I am going to take a pin and burst that little bubble of yours… SIPs don't make equities risk free

What.. but doesn't compounding benefits over the long term make it a safe option?

Hi everyone, I am SM and I am TJ, in today's ET Wealth Wisdom podcast we will tell you why equity mutual fund SIPs are not completely risk free

While it is true that SIPs reduce the risk of market timing and also allow investors to buy more number of units when their price has fallen, it does not make equity investing risk free. This is a big misconception

You know I have actually read stories where investors entered the market assuming that SIPs will make their equity investments risk free. And now they are shocked to see their investments in the red, especially those whose SIPs have run for a reasonable period of 2-3 years.

A big reason for this is because of the marginal fall SIP collections and sign of investor fatigue

Another reason for investors' disappointment is because most new SIPs were in mid- and small-cap schemes, and returns from many of these schemes have fallen sharply

That is true.. thanks to sky high returns just a few years ago.. many investors started SIPs in mid- and small-cap schemes and since most of them have generated low returns, investors are now upset now..

Some have even started reporting losses even over a three-year period

Here is another point that could be adding to investor disappointment.. experts say that investors are particularly disappointed because they raised their allocation to equities (started new SIPs) based on the returns from their existing SIPs. But then new SIPs failed to meet their return expectations.

And once you start losing money.. you stay away.. that is the average Joe investor's mentality

So what does an investor do? Stay away from SIPs?

Ok before I get to the advice.. the answer to anything negative when it comes to investing is not always stay way.. so.. here too… that is the answer

The SIP collections are still rising, though at a slower pace, because all investors have not stopped their SIPs. However, they may feel inclined to do so, if their losses pile up further. However, experts advise against stopping SIPs.

Just like increasing the number of SIPs during a bull market, reducing the number of SIPs during a bearish phase is also a bad idea

Sample this: The three-year SIP returns are close to zero for BSE Midcap and BSE Smallcap indices. But they have bounced back several times after going into negative in the past. So, investors who started long-term SIPs should continue them

Some investors start SIPs with a long-term view, but stop it if the 2-3 year returns go in the negative, say advisors. This is a bad strategy, and to get the full benefit of SIPs, you need to continue with them during bear markets

We will end with a caveat: you should invest in SIPs with a long term view… but then again there is no guarantee that you will generate positive return even if you do so for 10 years

Basically nothing is guaranteed? Even long-term SIP returns?


And on that note… that will be all from us for this week… Come back next week for more personal finance news and views..

Don't forget to visit etwealth.co for the latest.. and check out our official Twitter, Facebook and Instagram pages

Other useful Links

Follow us on

Download et app

Copyright © 2019 Bennett, Coleman & Co. Ltd. All rights reserved. For reprint rights: Times Syndication Service