Are Mutual Fund SIP Investments Low Risk?

In May 2018, Equity funds (including ELSS) witnessed net inflows of Rs. 11,350 crore, up 1.60% from Rs. 11,171 crores in April 2018.  Mutual Fund SIP Investments continue to gain traction, and their contribution has almost doubled in last two years from Rs. 3,122 crores in April 2016 to Rs. 6,690 crores in April 2018! Retail investors’ contribution has grown on the back of strong performance by equity-oriented schemes, investor education initiatives such as the “Mutual Funds Sahi Hai” campaign, and the efforts of a vigilant regulator towards securing investor interest.

Having said that, some experts are now beginning to voice their concerns about how investors, especially first timers, perceive Mutual Fund SIP investments. In fact, anecdotal evidence would suggest that a lot of investors actually perceive Mutual Funs SIP’s to be devoid of risk. Is that a correct assumption? Let’s delve into it.

Mutual Fund SIP’s do, in fact, absorb some of the inevitable shocks associated with the securities markets. Since all securities markets fluctuate (some more than others), there’s an obvious risk in investing lump sums of money at a go. When you invest via the Mutual Fund SIP route, you inadvertently wind up averaging the purchase cost of your units by buying more units for the same Rupee amount when markets fall, only to reduce your unit accumulation when markets go up. This effect is a lot more pronounced in volatile, aggressive funds such as equity-oriented funds, and a lot less in lower volatility funds such as debt funds.

Having said that, the fact remains that whether you’re investing via SIP’s or not; deploying moneys into equity markets is a high-risk venture. Even when you’ve taken the SIP route, market corrections could keep your returns stagnant for extended periods of time – or worse, sink your money into the red in the short run.

There’s a silver lining, though. With every SIP tranche that you deploy dispassionately (that is, without trying to “time” the markets), you actually reduce the overall risk associated with your investment.  In other words, long term Mutual Fund SIP investments, even if they are equity oriented, have an almost negligible chance of losing you money over long timeframes such as 7 to 10 years.

Basically, it’s a fallacy that Mutual Fund SIP’s are low risk (when they are equity oriented, that is). However, staying invested through all kinds of market cycles and keeping your SIP’s running through them all, will absorb much of the volatility in the long run and bring down risks. Investors need to be aware of the fact that SIP’s do not provide linear returns the way FD’s or traditional products do, and make investments with this awareness.

End Note: It’s true that Mutual Funds Sahi Hai; but for equity SIP’s – long term investing zaroori hai!