Are long-term systematic investment plans risk free?

Since systematic investment plans ( SIP) are based on dollar cost averaging method, it reduces investment risk in volatile asset class like equities.

It also helps to bring down the average purchase cost. This is because the monthly instalment is already fixed and therefore, it will fetch you more number of units when the price is low.

However, will SIPs make these investments ‘risk free’, if SIP is done for long durations (i.e. say for 10 years)? We tested this earlier on Sensex and found that SIP only reduces the risk and not eliminating it. And the annualised returns were negative for the 10 year SIPs ending between 2001 and 2003.

However, some mutual fund professionals objected saying that it should be tested not on market benchmark, but on actual fund NAVs. So we decided to test it once again on UTI Mastershare — the first NAV based mutual fund scheme in India launched in 1986.

As visible from the chart, the 10-year SIP returns from UTI Mastershare is also moving close to that of Sensex. Its 10-year SIP returns varied drastically, from a low of -6% to a high of 28% and this test also proves that long term SIPs do not make it risk free.