Does investing via SIP really help to contain risk?

We have seen a lot of mutual fund salesperson or mutual fund distributors claim that systematic investment plan (SIP) is the best way to invest. Now, we even get to see ads such as ‘mutual funds sahi hai’. It is believed that in context to SIPs, when the markets surge, you buy less units at high price and when markets tumble, you tend to buy more units at less price. This eventually averages out. It is popularly known as the benefit of rupee cost averaging.

Further, many may even not shy away to say that investment via SIP gives you better risk adjusted returns. Also, with SIP, you don’t need to time the market. But do all these things really make sense? Let’s see.

As a part of illustration, we have taken the values of Sensex from the year 2008 up to March 25, 2020. Here we are going to analyse in case you started SIP when the market was at its peak and is still holding it or in case, if you started it when the market was at its trough and are holding it till date. We have assumed SIP amount to be Rs 10,000.

Let us say that you have invested via SIP in January 2008. This was when the market was at its all-time high. Here with Rs 10,000 monthly investment (total investment amounting to Rs 14.6 lakh) at the end of the period, your investment becomes Rs 19.71 lakh. In this case, the compounded annual growth rate (CAGR) works out to be 2.5 per cent.

Now, let us assume that you invest via SIP in February 2009. In this period, the market was at its lower levels. The returns generated here was 2.13 per cent, which is even lower than if you had started it at market high.

Now, many would argue that this is not possible. However, it is important to understand that time has the greater value than anything else. Therefore, the more time you stay in the market, much better results you can expect. Therefore, SIP is not the tool to reduce risk but it is actually an option for those who cannot invest and time the market.

Ideally, the time of entry and exit does matter. Therefore, do hire a financial advisor who would guide you regarding the same.