How to Reduce Risk in Your SIP Investment?

Everyone do SIP for their future, be it for their own retirement or Daughter's education or Son's marriage. What would you do if your SIP corpus goes down 50% due to market crash when you need money? How can one handle the risk involved in SIP? Here's the ideal solution.

When it comes to SIP everyone knows that if you invest X amount every month, you are going to get 10X after n number of years. Everyone talks about returns but hardly anyone talks about the risk involved. Let's see how markets behaved historically. Sensex moved from 100 to 80000 in 44 years. Most SIP investors just focus on the destination not the journey, during this 44 years, Sensex has witnessed multiple instances where it has seen more than 50% corrections.

Now lets look at SIP investor journey who invested just Rs.500 every month since 1990, his total investment value is Rs.2 lacs whereas his total returns is more than 25 lacs now. In order to achieve this corpus what are the hurdles he has gone through?

He invested every month for ten years from 1990 to 2000, during this 10 years period he has witnessed multiple instances of market correction. At the peak of year 2000, his SIP investment returns was more than 100%. Invested Rs.55k where corpus was Rs.104k.

But within next few months dot com bubble burst, SIP investment portfolio crashed. Inspite of doing SIP for 10 years, he could see his overall fund value is lesser than his invested value. Image you planned your retirement after 10 years, when you were about to withdraw the fund, you will be in for a rude shock looking at your portfolio going down significantly when you need them the most.

Many SIP investors have end goals, after n number of years they want to depend on this SIP investment corpus to meet their goals. But markets are cyclical, it does up in the long run but no one knows when a crash would come. No-one would have believed you if you said the whole world is going to be shut when you are celebrating new year eve in 2019. Everyone were optimistic at the start of year 2008 yet that was one of worst crisis period the world has ever witnessed. So we never know when the crash is going to come and no way we can avoid it, but we can manage it.

In order to manage this risk, we not only need to diversify the SIP with various mutual funds or various stocks, we need to diversify the SIP with different asset class. Equity and Gold. At times of uncertainty, investors move out from risky assets like equity and move to safe bet like Gold. Most people tend to think Equity and Gold are uncorrelated.

But if you do the data analysis , you will realise both are highly correlated, it is 0.917 so both tend to move in same direction but this is applicable in long run. We are focused on handling uncertainty period, whenever there is a crash in equity market how Gold performs? During such period Equity and Gold are totally uncorrelated.

When market crashes, Equity goes down and Gold price moves up. It is clearly evident during the global financial crisis in 2008 and Covid crash in 2020. Instead of doing SIP only in equity, if we invested equally between both Nifty and Gold, how our SIP would have performed in the long run and how much risk we would have faced during the crash?

Consider you have invested Rs.10000 every month in equity from 2007 to till date. Your total invested amount would have been Rs.20 lacs whereas your fund value would have grown to Rs.62 lacs. But during the covid crash you would have seen portfolio going down 30%.

Instead if we have invested Rs.5000 in Goldbees and Rs.5000 in Nifty bees during the same period, how much corpus it would have grown and how much downside we have would have seen during covid crash?

Corpus would have grown to Rs.59 lacs where during covid crash the portfolio crashed only 10%.

With only Equity as SIP you made 62 lacs whereas with Gold+Equity as SIP you made 59 lacs, just short of 3 lacs but it comes with a big peace of mind as the max downside we witnessed is only 10% during the crash. People who wish to add Gold with their SIP investment, can invest in Goldbees ETF or can invest in any of the Gold mutual funds. By having Gold in your SIP portfolio you are considerably reducing your volatility that gives you peace of mind.