In life, there is no such thing as a free lunch and in equity markets there is no such thing as a risk-free investment. A Systematic Investment Plan (SIP) is touted as one of the best ways of investing in the equity markets. It comes with myriad benefits and can help investors meet their financial goals. However, every investment vehicle has its own set of challenges that one needs to be aware of and then address in a systematic and judicious manner. Risks in sip can be considered similar to the risks attached to investments – every form of investment comes with a certain amount of risk and, historically, risk has been directly proportional to the rewards offered by the investment. So, if you invest in equities, the risk in SIP investment is directly proportional to the returns you stand to make, if your investment is successful. However, risks in SIP are lower than the risk in direct investment or lumpsum investment because, firstly, you are only investing a small amount, rather than parking your entire corpus. While there is an underlying risk in SIP investment, it is offset by the fact that your investment has time to overcome potential losses, as long as you invest for a longer period of time. Investments are akin to a committed relationship – the longer you stay in the relationship, the greater your reward tends to be. and, being aware of the challenges with an SIP can help investors mitigate the following risks and reduce their impact.
Risk associated with SIPs and its mitigation:
One of the main benefits of investing through an SIP is “Rupee Cost Averaging”.
However, the benefits of rupee cost averaging can recede considerably with an increase
in the investment corpus.
Example: Let us assume that a monthly SIP of Rs.10,000 grows to Rs.6 lakhs
in 5 years. If the markets were to witness a sharp fall of 10% at this time, then
an SIP of Rs.10,000 would not be sufficient to average out the losses from the fall.
Solution: An intelligent way to combat this risk is to do an SIP Top-up in
such situations. By increasing the SIP amount in tandem with the growth in corpus
one can ensure that averaging is done effectively.
The very nature of equity investments is uncertainty. While an SIP route ensures
that an investor can reap the benefits of the equity markets, it does not guarantee
a fixed return at the end of the tenure. If an investment is done keeping a specific
goal in mind, then it is not necessary that the desired returns will be realised
at the time of goal fulfillment.
Example: Let us say that you started an SIP to meet a goal of ten years from
now. However, at the end of the ten year period the equity markets are down. Consequently,
if you choose to end your SIP in this year then you run the risk of not being able
to meet your goal.
Solution: Do not end your SIP in the year when you want to achieve your goal.
Instead, plan your SIP judiciously and end it much before. Once you end the particular
SIP, slowly start shifting to a liquid fund as you approach your goal.
Markets are not unidirectional. Consequently, they give investors ample opportunities
to participate in a gainful manner. Stock market corrections often give investors
an opportunity to invest in stocks of good companies at compelling valuations. In
such a scenario, a lumpsum investment might be more beneficial than a simple SIP.
Solution: When equities are available at compelling valuations, investors
can choose to increase the amount they invest through an SIP.
Many people feel that SIPs should be done only in high risk/ high return kind of
funds which are held for the long-term.
However, an SIP is an investment vehicle that can help investors invest in all kinds of fund and for varying time frames.
Investors should choose a fund for SIP based on their individual risk profile, goals
and investment horizon.
Solution: Seek advice and understand your risk/return objective to invest
wisely in a fund that can help you achieve your financial goals.
Time Frame | Investment Options |
---|---|
Very Short Term | Debt Funds |
Short Term | Balanced Funds |
Medium Term | Large Cap Funds, Mid Cap Funds |
Long term (10+ years) | Mid Cap Funds, Small Cap Funds |
The above is only for illustration purpose and can vary as per individual requirements.
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MUTUAL FUND INVESTMENT ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.