According to Mint reports, SIPs are effective tools for reducing entry-timing risk through rupee-cost averaging but cannot shield investors from other critical risks. Aditya Agarwal, Co-Founder of Wealthy.in, emphasized that while SIPs help investors avoid investing large lump sums at market highs, they do not eliminate risks arising from expensive valuations, portfolio concentration, liquidity constraints, or poor fund selection. The expert warned that disciplined investing alone cannot overcome valuation risk, as investors in segments trading at stretched valuations may still face lower long-term return potential despite disciplined investing.
As reported by Mint, SIPs smooth market entry, not market volatility. Agarwal explained that if an investor starts a ₹5,000 monthly SIP when a mutual fund's NAV is ₹100, the first instalment buys 50 units. If the market corrects and the NAV falls to ₹80 the following month, the same ₹5,000 investment purchases 62.5 units. While investors who continued SIPs during the sharp market fall in early 2020 experienced temporary declines, they benefited significantly from subsequent recovery by accumulating more units at lower prices. However, the portfolio may still witness temporary declines during corrections.
According to Mint reports, SIPs cannot protect against expensive valuations, even with disciplined investing. Agarwal cited an investor who invested ₹10,000 every month for five years in the Tata Digital India Regular Growth Fund, totaling ₹6 lakh. While the SIP helped avoid investing a lump sum at the technology sector's 2021 peak by averaging purchase cost, the investment still delivered a slightly negative annualised return of around 0.67% as the technology sector underwent multi-year derating after valuations became stretched. The expert noted that staggered investing does not automatically make expensive assets inexpensive.
As reported by Mint, multiple SIPs do not automatically create diversification, and investors in funds with overlapping holdings may still be exposed to the same sectors and stocks. Agarwal warned that during sector-specific downturns, all such funds can decline simultaneously irrespective of the investment mode. Similarly, SIPs do not reduce liquidity risk, as demonstrated by the closure of six debt schemes by Franklin Templeton Mutual Fund in 2020, where investors faced redemption restrictions because underlying securities became illiquid. The investment route, whether lump sum or SIP, did not alter the liquidity profile of the portfolio.
According to Mint reports, a prudent investment strategy combines SIP discipline with periodic portfolio reviews. Agarwal emphasized that diversification across market capitalisations, investment styles and asset classes remains essential, as SIPs alone cannot eliminate all investment risks. The expert shared that staggered investing through SIPs is effective for managing entry-timing risk but should be combined with regular portfolio reviews to address valuation, concentration, liquidity, and fund-selection risks that cannot be mitigated through systematic investment approaches alone. Position sizing in trading is one of the most powerful risk management tools, with experts recommending spreading capital across 8-10 sectors and avoiding emotional overexposure by limiting allocation per stock.
