But beware; there are periods when SIP doesn’t work well, though we have not heard of fund companies or distributors tell you about when SIPs fail and why. Rigourous back testing done by Moneylife suggests that one of the three conditions when SIPs don’t work is when

Lump-sum did better in periods when SIP was started just before a market peak. One such period was from November 2003 to November 2008.

This five-year period provided no  opportunity for an investor to buy lower than the previous purchase price, except towards the end—after the market crashed. Despite the crash, a lump-sum investment would have given a CAGR of 12.50% whereas a SIP in this period would have given an internal rate of return (IRR) of just 0.48%. However, it is unlikely that we may see such a period again for a long time.

SIP can mean capital loss!
There are no guarantees for market-linked products. You could lose money in stocks, bonds and equity schemes, depending on when you buy and sell. What are the chances of losing capital through your SIPs? Look at the five-year periods between January 1991 and May 2012. There were 197 such five-year periods when you could have started your SIPs.

It might shock you to know that you would have lost money on 41 occasions. That is, there is a nearly 20% chance of losing money for running a SIP over five years. In seven-year periods, you would have met with almost the same fate. For the 10-year SIPs, the percentage chance of loss would get reduced to 15% but it still is there.