A mutual fund SIP will not help you reduce risk when the market falls!

Published: June 23, 2022 at 6:00 am

Many investors incorrectly believe that a mutual fund SIP is a “strategy to reduce risk”. Unfortunately, this is not the case. A SIP is merely an automated way to buy mutual fund units on the same date of each month.

If the markets move up, long term SIP returns move up. If the market moves down, long term SIP returns move down. There is no risk reduction or downside protection mechanism built into SIPs.

Some claim that SIPs help average the buying price. What this means is, that sometimes the NAV on the SIP date is high and sometimes it is low. This only changes the number of units purchased each month. This does not help in any way to decide the final return.

The final return is decided only by the (latest) NAV on the date of redemption or return computation. This is because, after a few instalments, the value of your investments behaves like a lump sum facing the full heat of the market.

Suppose your corpus is the bucket, and the mug is the SIP. Each month, you take a mug of water and fill the bucket. When you keep doing this for months and months, the amount of water in the bucket will be much more than the amount of water you add each month with the mug.


Build a complete financial plan with our Robo Advisory Tool. More than 1000 investors and financial advisors use it!
Get free money management solutions delivered to your mailbox! Subscribe to get posts via email! (Subscribers get exclusive discounts!)


New Tool! => Track your mutual funds and stocks investments with this Google Sheet!

This bucket of water is now facing the full market volatility. when the market falls, your corpus will reduce by almost as much (water in the bucket will reduce) regardless of the buying price (when you poured the water).

The risk and reward associated with a mutual fund SIP become similar to that of lump-sum investment. For proof of this statement see: SIPs do not reduce risk or enhance returns!

Let us now consider some evidence for “final SIP return is only decided by final NAV”. For this, we shall consider rolling 10-year SIP returns of the Nifty 50 Total Returns Index.

From 1st July 1999 to 1st June 2022, there are 157 10-year windows possible (the SIP start dates are spaced one month apart). Some representative data points are shown in the table below.

Start DateEnd DateNifty 50 TRI 10Y SIP XIRR
01-07-199901-07-200919.23%
02-08-199903-08-200920.59%
01-09-199901-09-200920.11%
—-—-—-
02-05-200602-05-20169.41%
01-06-200601-06-201610.19%
03-07-200601-07-201610.40%
—-—-—-
01-06-201101-06-202114.29%
01-07-201101-07-202114.30%
—-—-—-
02-07-201201-06-202213.31%
01-08-201214-06-202212.28%

The full data set is plotted below. The Nifty TRI data is shown in red on the right axis.

157 Nifty 50 TRI 10Y SIP XIRR Data points bet July 1999 to June 2022
157 Nifty 50 TRI 10Y SIP XIRR Data points bet July 1999 to June 2022

It is easy to see that each time the market is down, the 10-year SIP returns are also down. Thus a mutual fund SIP will not help you reduce risk when the market falls! The final return simply depends on the final NAV.

The inconvenient truth: You can be patient, you can be disciplined, but there is no evidence that “systematic long term investing in equity” will ALWAYS be successful! See: The stock market always moves up in the long term but returns move up and down!

Also see: Equity may beat inflation but that doesn’t mean you will!

So what is the solution? Time the market? Tactical entry and exit? NO. These are not necessary (they could work, but they are not necessary).

All one needs to do is

  1. have a goal;
  2. have a clear deadline;
  3. calculate the target corpus;
  4. decide on a suitable asset allocation for that goal;
  5. invest systematically; We are not against the SIP!
  6. start reducing equity allocation well in advance (not that 3Y before goal nonsense) systematically to get close to the target corpus independent of market conditions (there is enough evidence that this works no matter what the current market is like). See: How to reduce risk in an investment portfolio.

It is obvious that one should wait when the equity market is down. That is not the point. The point is, are you waiting with a clear strategy or are you waiting based on hope?

So do not blindly invest using a SIP assuming everything will be alright in the end. That may not be the case. Instead of relying on hope, create a plan as mentioned above independent of market conditions. You can consult this seminar to get started the right way: Basics of portfolio construction: A guide for beginners.

Do share if you found this useful

Explore the site! Search among our 2000+ articles for information and insight!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation for promoting unbiased, commission-free investment advice.
Use our Robo-advisory Excel Template for a start-to-finish financial plan! Now with a new demo video!  More than 1000 investors and advisors use this!
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 2800 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 675 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
My new book for kids: “Chinchu gets a superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both boy and girl version covers of Chinchu gets a superpower.
Most investor problems can be traced to a lack of informed decision making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, if we had to groom one ability in our children that is key not only to money management and investing but for any aspect of life, what would it be? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parent’s plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Did you know? We have more than 1000+ videos on YouTube to explore! Join our YouTube Community!

Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners .every month.
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps