SIPs are systematic investment plans that beginner investors mostly consider because of the lower amount of risks involved in them. These plans are offered by various financial institutions but not all can suit every investor’s specific requirements. This makes it essential for an investor to understand the various risks and rewards attached to these funds. This understanding will help an investor to make an informed decision related to their funds. This article discusses some of the major risks associated with investing in SIPs and some of the decent SIPs that can be considered by a person.
Risks Associated with Investing in SIPs
SIPs are risky investments which makes it necessary to conduct well-defined research on various risks attached to these investments. This understanding will help one decide which SIPs are suitable for one’s requirements.
Market Volatility
The prices in the stock market keep fluctuating based on the market conditions. These market conditions can arise due to various economic conditions arising in the economy. These conditions can include changes in political conditions as well, as this makes the prices fluctuate. Experienced Investors try to make huge profits in such situations but people even tend to have huge losses as well.
Underperformance of Portfolio
When one decides to invest in SIP they must know that there’s no guarantee that the portfolio will perform at par only. There can be various reasons due to which the portfolio can underperform and an investor must be ready for that. This underperformance can be due to reasons such as a specific sector not performing well or any other reason. Also if a portfolio has been performing below the level of its benchmark then that also might require changes in the portfolio.
Liquidity Risk
Another risk involved in the investment in SIPs is the risk of liquidity. The investments done in equity-related funds are less liquid as they often include a lock-in period. A lock-in period does not allow the investor to withdraw money from the investment before a specific period. This reduces liquidity and doesn’t allow one to have access to their funds which could have been further invested elsewhere for better performance.
Low Returns in the Short-Term
One of the risks involved in investing in SIPs is that they can offer low returns in the short term. This is why it is advisable to stay invested in them for longer periods as they offer better returns in those periods. These investments have provided low or negative returns when invested for 3 to 5 months because of market fluctuations. This creates a risk of wastage of funds if withdrawn too quickly.
Ways to Deal With These Risks
There are various risks attached to the investments investors make in SIPs. This is because SIPs are eventually a type of investment that invests some amount of funds in equity. These equities involve various risks which one must know how to deal with to take maximum advantage from these investments.
Diversification of Portfolio
One way to deal with risks attached to SIPs is by choosing a SIP that offers a mix of equity and debt. This mix provides the opportunity to diversify the risks attached to the investments. This risk diversification helps with return maximisation. For ex. A low-risk taker can invest more of their funds in debt instruments and less in equities.
Investing for the Long Term
To experience the power of compounding, it is essential to stay invested in SIPs for longer durations. This is because, the longer you stay invested, the more you avoid short-term fluctuations and benefit from market recoveries. A long-term approach towards SIP investment helps smoothen the risk associated with market volatility
Regular Review
Reviewing your SIP investment frequently is essential as it helps you understand your portfolio’s performance under various market conditions. It also helps you to realign your investments according to your changing times and financial goals.
An investor can choose to invest in debt securities if they wish to achieve some short-term goals such as planning a vacation etc. Alternatively, if an investor wishes to achieve long-term goals like purchasing a home, or retirement planning, they need a solid investment product. This goal achievement can be achieved by investing in the equity share market as they have proven to provide a significant amount of returns in the long run.
Conclusion
Investing in SIPs is considered a safer investment as compared to the other investment alternatives available in the market. This is not completely accurate, because these investments often involve some risks. These risks include market volatility risk, liquidity risk, low returns in the short term and underperformance of the portfolio. One need not worry about these risks if one knows some of the ways to deal with such risks. These ways include building a portfolio based on your risk tolerance and diversifying the portfolio. Apart from this, one must consider making these investments from reputed platforms such as Tata Capital to save themselves from any fraud, also this helps in making the most out of one’s investment.
ThePrint BrandStand content is a paid-for, sponsored article. Journalists of ThePrint are not involved in reporting or writing it.