Warren Buffett on Making Investment Mistakes Video

What Is the Risk of Investing in SIP?

Actual Question:

What is that I am risking if I would be investing in SIP for more than 40 years? Supposedly I have been investing 10K for more than 40 years will I get a considerable return from SIP , How much is the percentage of risk in SIP?

Answer:

‘Systematic Investment Plan (SIP)’ is indeed a safe investment. However, SIP is not product or a mutual fund unit by itself but merely refers to a habitual monthly investment. Through SIP you may invest in a mutual fund or an exchange traded fund (ETF) or directly in stocks.

Therefore, when you want to invest Rs.10000 every month for 40 years, which is indeed commendable, you must know in what kind of product you must invest in. For example, if keep investing for 40 years in income or debt fund, while the principal may be safe you will not be a rich and wealthy person after 40 years. Besides your good resolve, you need to play smart too!

Please invest in a well diversified index mutual fund through the medium of SIP. Here is what you can be worth after 33 years of active investments and keeping the investments alive for another 20 years.

Related Links:

• What is the Minimum SIP Subscription Amount and Best SIP?

• What Is The Difference Between Dividend and Growth Fund. Which Is Better?

• Is SIP Safe To Invest?

• Which One is Better: Recurring Deposit in Bank or SIP in Mutual Funds?

• What is the Minimum SIP Subscription Amount and Best SIP?

Index Funds of Top 10 Mutual Funds

Meaning:

Index Funds are passive mutual funds that track a popular stock index. Diversified index funds are recommended for investors who cannot afford to learn and invest on their own.

They are called passive because the fund manager need not actively manage the fund by way of frequent purchase and sale of stocks. Stock indices do not undergo frequent changes. Index funds that track popular indices, once constituted by buying shares of that constitute the index in exact proportion, does not require any change unless there is a change in the composition of the index, which is a relatively infrequent event.

Diversity contributes safety based on the principle that when we have a large basket of stocks (about 500 stocks) 80% perform average, 10% perform brilliantly and another 10% will prove to be total duds; overall such diversified portfolio will give reasonable safety.

Example:

We present here a list of index funds offered by ‘The Top Ten Mutual Funds of India’ ranked by the assets under management:

Name of Fund	Index Fund Available?		Name of Index	Number of Stocks	Diversified?
ICICI Prudential Mutual Fund	YES	ICICI Prudential Nifty Next 50 Index Fund	CNX S&P Nifty	50	POOR
HDFC Mutual Fund	YES	HDFC TOP 200 FUND	BSE 200	200	REASONABLE
Reliance Mutual Fund	YES	RELIANCE TOP 200 FUND	BSE 200	200	REASONABLE
Birla Sun Life Mutual Fund	YES	BSL Top 100 Fund	TOP 100 By Market Capitalisation	100	SPARCE
SBI Mutual Fund	YES	SBI NIFTY INDEX FUND	CNX S&P Nifty	50	POOR
UTI Mutual Fund	YES	UTI - Nifty Index Fund	CNX S&P Nifty	50	POOR
Franklin Templeton Mutual Fund	YES	Franklin India Index Fund - NSE Nifty Plan	CNX S&P Nifty	50	POOR
Kotak Mahindra Mutual Fund	YES	Kotak Sensex ETF Fund	S&P BSE Sensex	30	POOR
IDFC Mutual Fund	YES	IDFC Nifty Fund	CNX S&P Nifty	50	POOR
DSP BlackRock Mutual Fund	YES	Top 100 Equity Fund	S&P BSE 100	100	SPARCE
This list is not exhaustive. Funds may have other index schemes that may be more diversified.

Conclusion:

Even though the Bombay Stock Exchange has a well diversified, ‘S&P BSE 500 Index’, we are unable to locate an index funds tracking this index. Perhaps the reason is to cater to customer perception that top index companies are safer and will provide better returns. However, in reality it is a only a fund that tracks a well diversified index that ensures safety and growth.

Sow More-Pay Less Poem

Is SIP Safe To Invest?

SIP of course is safe to invest in, unless the world is destroyed by a nuclear conflict or climate change, which I do not foresee happening anytime soon.

Besides external factor like wars and global warming, we ourselves destroy the inherent safety of investments, including the SIP, by constantly worrying about the performance of the investment, market conditions, etc. The media also is doing a lot of disservice to the investors through their relentless noise.

What is the Solution? Once you have started a SIP, just keep it alive, by monthly subscription, for a very, very long time, like 20 to 50 years. Simply turn a deaf year to what the newspapers may say or your family or friends may advise. 

By following this simple formula you not only ensure the continuation of the already built-in safety of the SIP, but also let the 'Miracle of Compounding' to work in your favour and most likely by the end of the said long period you will end up a very rich and character wise a very strong and disciplined person.

Risk Comes from Not Knowing What You are Doing

Businessman jumping across the mountain taking risk

Driving an automobile is Not Risky; driving, without adequate training is – not only to the driver but also to all other unsuspecting road users, and that is why my Guru, Warren Buffett said, “Risk Comes from Not Knowing What You are Doing”.

Often I have heard people proclaim, sporting an, “I Know Everything” smile, that they diligently avoid investing in stocks, as it is Highly Risky.  On questioning how they had come to such a conclusion, they would invariably attribute the wisdom to their parents, teacher, colleague or friend. When questioned where they would prefer to invest, they would retort, with authority, “Corporate Fixed Deposits and Bonds – Rock Solid Safety”.  Sadly, after a few years, I have seen many of them Loose both Capital and Interest, and repent their poor investment decisions.

The moral of the story is, Risk or the Lack of It, does not lie in any particular instrument, but lack of knowledge.  A fixed deposit with a government bank in India indeed is as solid as rock, there is no doubt, but with an interest rate around 7% per annum and inflation near or above the rate of return, the “Value” of your investment is bound to be eroded for sure, over a period of 15 to 20 years.

On the other hand, if an investor had invested Rs.1,00,000 ($ 1470) in “NIFTY 50” in January 1995 and had simply forgotten about it, today in June 2016, it would have grown to Rs.809,400, a growth of 709% or a Compounded Annual Growth Rate (CAGR) of a whopping 32.99% per annum.  Even after an assumed, high, inflation rate of 10%, the investor would be left with a net return of 22.99%, Compounded Every Year!  So, Where Does Risk Lie? Not in the “Instrument”, certainly, but in “Ignorance”.