Let us get the facts cleared once for all.

Equities are risky. Equities are risky. Equities are risky. 

Well risky and volatility are slightly confusing, so let me continue with the word risky. For the layman this means “his money invested can fall by 10, 20, 30, 40%…and stay for a long period of time and frustrate him for a long time FORCING him to pull out his money..and then go up 89% in one year, multiplying his frustration and anger”.

Now let me come to the main post. Equities are volatile but is very likely to give you INFLATION BEATING RETURNS (AKA real returns) and in the long run create wealth for you to meet your goals. NOT being able to meet your goals is actually the biggest risk in a portfolio.

So if equities are risky why do we invest in equities?

Fair enough. We invest in equities so that we get REAL RETURNS and we need real returns to meet our goals. Therefore for longer term goals like children’s education, our own retirement, etc. WE NEED TO INVEST IN EQUITIES.

So if equities are risky what can we do to reduce the risk?

If you invest in a single equity share it could fluctuate wildly or even go to zero. A case in point is TATA MOTORS. As an investor you have made no money in TM at least over the last 3-5 years. Similarly from 2012-17 you would have got zero returns in RELIANCE INDUSTRIES. These are big companies well run but had poor investment runs. To avoid such situations we invest in the top say 30 companies (Sensex) or top 50 companies (NIFTY) or in well constructed portfolios run by mutual funds.

The other thing we do is we invest regularly so that over a 7 year period we invest (say monthly) and SMOOTHEN our investments, and thus hopefully our returns too. This method is called SIP.

So selecting a good quality portfolio, investing regularly over a 5/10/30 year periods is a nice way to REDUCE the risk in our equity investing.

Does this mean there is NO risk in our SIP portfolio if we take a 5/10/30 year term?

Largely yes. Over a 10 year period chances of you getting LESS THAN YOUR INVESTMENT is almost nil, but there have been periods in history when this too has happened. However for all practical purposes this probability can be ignored.

Why does the MF industry keep saying Equities are risky and SIP is safe?

Well Mutual funds have two jobs – collecting money from you for investing, and managing the money. All mutual funds need to gather money, preferably on a continuous basis so that they have money to manage. So most of their communication is to tell you how incompetent you are to manage the money (forget your education, experience…etc), you do not have time, and we are the experts.

SIP feels like a RD (recurring deposit). Your mind is now used to this RD because your grandparents, parents, etc. all of them did do RD. So this is more acceptable to you.

The lowest end salesman finds it very difficult to explain all this to you. So he has either been tutored or it is a self learnt nonsense that you can NEVER lose money in an SIP. This is wishful thinking. You should believe this only at your own peril. Mutual fund industry creates a perception that SIP is safe.

Are you saying we should not invest in a SIP?

No. First of all you are investing in a mutual fund (equity mutual fund in this context). Equities are risky. You are selecting a portfolio (risk reduction) and you are investing regularly (monthly), over a seriously long period of time (say 20 years). You have reduced risk. This risk can NEVER ever be eliminated.

What is riskier than this in the long run?

In a recent stupid advertisement we are hearing that debt is less risky. That is stupid. If you have a long term goal (say 20 years), it is debt which is risky over that period, not good quality equity. The worst risk in ANY portfolio is NOT being able to meet your goals.