What are the Risk Factors in SIP?

What is SIP?

A Systematic Investment Plan or SIP is one of the best and easiest modes of investment. The money is invested in mutual funds which further gives you returns. By getting into the habit of investing in SIP, you allow yourself to grow financially in the future as a certain pre-determined amount will be regularly invested.

SIP gives you the flexibility to choose between various investments options like monthly or quarterly. Post this the investments will be done based on your preferences, and you have the option to put an auto debit from your bank account, to never have to worry about missing the payment deadline. Considered to be an aid, SIP gives you the freedom to choose; the value can be increased or decreased given to the fund value. You also get an option to discontinue, if you wish. At any given point in time.

Why should you invest in SIP?

  1. It makes you financially disciplined

Whoever you talk to about SIP they will suggest it to you only because it gives you the financial ability and increased profits. But I feel this is only correct partially; SIP puts you into a routine of financial discipline. It makes the investor think the way they are supposed to think.

Many investors are on and off with their investments given to the market trends; they start investing money when they feel like it and stop it as an when they wish. SIP is a regular one, inculcates the discipline they lack and ensures they are regular with their investments.

By starting SIP investors are bound to invest a fixed amount of money whether they like it or not. Here they can be lazy stating market is not doing good or like that. The best part about SIP investment is since the money gets automatically debited from your bank account on a given date you are not left with much choice to not pay for the investment.

The best way to bring in this discipline is to put the debit date closer to your salary day, so as soon as the salary gets credited, SIP amount will be debited. It is extremely important to save before spending if you want to build a strong financial portfolio.

  1. The power of Compounding

In simpler term compounding is nothing but earing out of your earnings. You earn by reinvesting your interest which you earned while your first investment. Compounding holds a very strong power to make your money double, and you can earn a huge chunk out of your small investment. It is always advisable to start investments as soon as possible even if the amount is small. There is no such time as right time.

  1. Averaging your purchase cost

People dealing with stock markets are well aware of how difficult and volatile it can get at times. The smart investors take care of it by making the purchases when the market is down or low and selling the stocks when the market is sailing high at the peak. But this can get tricky at times, and you might just miss the timings.

You just can never be correct in predicting the market, and it might just crash right in front of your eyes. So to be sure and worry-free about this, the best practice is to average the purchase cost time and again. This will ensure you are not at high risk.

How do you start investing in SIP?

It I very easy to decide when to start your investment but the difficulty arises when you actually have to start it. Before making any SIP investments always answer the bellow first:

  1. What is the goal and will this investment help me with it?
  2. By when will I need this investment money? How much time do I have?
  3. Am I able to research well or should I consider taking some help from an advisor who can help me reach my goal in an efficient manner?

By considering these, you can be sure about what your actual needs are and what you need to do. This will basically work as a roadmap for your investment journey.

The moment you have answers to these you are ready for making the investments. The investment can be done very easily, through your bank accounts or through cheques. The mutual funds where your money will be invested have a tracking mechanism in place and you can easily track how much you progress have made with your investment.

How does SIP work?

SIP works the same way as your mutual funds. There are experts out there whose core job is to take care of your investments and make them grow.

Through SIP you invest in mutual funds on a regular basis. You buy units on a monthly basis and start your saving scheme. The edge you get in SIP as compared to other investment plans is you need not worry about market volatility and need not time your investments. By regular investments in SIP, you tend to make sure you are invested at every step irrespective of the market positioning. You do not have to worry about the workings, and you will also not miss out on any opportunities.

The investment can be done by investing a certain amount wither quarterly or monthly, through cheques or auto debit facility provided by the bank. You just need to fill out an application and a mandate to mark your investment date. Following this, the money will be auto-debited from your bank account as per your instruction is given. These forms can always be given to your nearest investor service centre or agent. The money that your are investing will be invested based on the net asset value on the particular investment day.

Why SIP- key learnings?

  • It makes you disciplined with your investments.
  • You don’t have to worry about how the market is working and when to invest
  • By averaging rupee cost, you are befitted from the volatility of the market.
  • With the help of compounding power, you make more money through the interest earned.
  • You do not have to worry about a large chunk of money; you can always start small.
  • You can easily achieve your goals and dreams by making just small investments.
  • Make a plan how much you need to invest to reach to that goal, Experts are always ready for your help.
  • Once identified start investing and fill out the mandatories.
  • Long-term investments are beneficial as they will help you get dual benefits of averaging rupee cost and compounding power.
  • You get to choose options based on your needs; you can always invest in multiple schemes based on the returns you need.

Benefits of SIP

  1. You get to choose your own investments options, based on your earnings and needs. Any extra income is always welcome to increase the returns.
  2. Unlike other investments options available in the market, no charges are being levied on stopping the plan. You can stop whenever you need to or want to. You always have an option to get your money back as and when needed.
  3. Investments could not have been any easier, SIP gives you that ease as everything you do is online unless you choose to do it otherwise.
  4. You can just sit and relax and need not worry about constant checking on your investments. The experts take the job care. You can be sure your money is only going to grow.

Cons of SIP Investment

Just like any other investment, SIP also has some cons:

  1. Risk is always there, SIP investment does not mean you have eliminated your risk. You cannot always expect positive returns while investing in SIP for short period. All the investments made are bound to undergo risks like liquidity risks, credit risks, etc.
  2. There is often a misconception that SIP investment is better than one-time Many a times SIPs don’t work due to market volatility, and these are the times when lump sum investments come in handy.
  3. Many people tend to start SIP investments just looking at others. This is a wrong approach and can lead to financial losses. You need to define your needs and goals and make sure you are investing correctly to gain returns.
  4. By just investing into SIP you cannot assume you are done, to get gains you need to ensure the funds you have invested into are the correct ones for your needs.

Why is SIP risky?

Just like any other investment, risks are involved in a SIP as well. These risks differ on the basis of the mutual fund. The amount of risk involved in a SIP is only identified after considering the risk profile, fund liquidity and risk appetite. Fund managers and fund houses are the best options for managing and reducing risk.

Risk 1. Price Risk

It is always said that mutual funds are a risky business. The investment in mutual funds via SIP can go down the lane any moment, and you might end up getting a lower return on your investment based on the market behaviour.

Mutual funds are no doubt quite risky. Your investment can change its course in a matter of seconds depending on the behaviour of the market.

Risk 2. Liquidity Risk

For everyone investing, the main motive is to get the money back quickly. Usually, mutual funds have this facility, and you can get the money back at an instant. There have been periods where there were some issues faced by the market in selling the bonds which affected the mutual funds, they had to limit their withdrawals.  The market associated with SIP, equity market, is liquid to a huge extent and selling and buying of funds is not at all a challenge. But if the buyer quantity exceeds the quantity of the sale to a huge extent, it will become an issue and pay-outs will be affected resulting in liquidity risks.

Risk 3. Credit Risk

The price of the bond of any company is dependent on the credit rating agency. If the rating falls, or there is any downgrade the price will drop. Once there is a price drop, the overall value of that particular bond is impacted and thus the credit risk.

Risk 4. Default Risk

Companies often do not pay their bondholders on time and this impacts the entire portfolio of the investment. Such an impact is quite negative for the investor and this in turn leads to something known as a default risk.

Risk 5. Technology Risk

Being a technology-driven economy, today even the smallest of transactions are happening electronically. This means there are many touch points involved and failure of any point is way higher. This will end up resulting in transaction failure of the SIP which is a risk to it.

Risk 6. Fund Management Risk

A huge risk that is associated with a SIP is that the scheme might not perform as well as expected which in turn would result in lower returns than what was expected. The underperformance of the fund manager may also be a cause of this.

The above-mentioned risks are some of the major risks which are associated with SIP investment, though there are many more risks and can be elaborated to a high extent, they are more or less similar and can be categorised based on the above.

Just like any other investment option SIP also has risks and is just a way to your investment. Before making any investment choices one should always verify and analyse the details of the investment associated and plan accordingly considering the risk appetite and the end goal. However if prepared well SIP can turn out to be a great investment option and aid you in wealth creation by giving you good returns and convenience with your investments.