There is no such thing as a free lunch in life, and there is no such thing as a risk-free investment in the stock market. One of the greatest methods to participate in the equity markets is through a Systematic Investment Plan (SIP). It has several advantages and can assist investors in achieving their financial objectives.
On the other hand, every investment vehicle has its unique set of issues that must be recognized and addressed in an organized and reasonable manner. Being aware of the problems associated with SIPs might assist investors in mitigating and reducing the following risks.
Here are the risk factors involved in SIP:
A famous phrase is that mutual fund investments are susceptible to market risks. This implies that depending on how the market acts, your SIP investment might go down, and you could finish up with a cause reduced than what you invested.
The risk in a SIP, on the other hand, is proportional to the holding time, and the longer the holding period, the smaller the risk. The likelihood of generating a profit improves as the holding time lengthens. Take a look at the chart below for how a longer holding time for stock reduces the risk of loss.
Trading volumes and settlement durations may limit the liquidity of investments made in shares. Unforeseen situations may cause settlement timeframes to be greatly prolonged. While assets listed on a stock market have lower liquidity risk, the stock exchange’s total trading activity limits the capacity to sell these investments.
The incapability of a mutual fund to sell assets kept in its portfolio may result in possible losses to the scheme if the value of securities maintained in the portfolio falls in the future and may result in the fund suffering losses until the deposit is eventually sold.
Rupee Cost Averaging doesn’t work efficiently
“Rupee Cost Averaging” is one of the key advantages of investing through a SIP. The advantages of rupee cost averaging, on the other hand, might diminish significantly as the investment corpus grows.
Assume that Rs.10,000 monthly SIP rises to Rs. 6 lakhs in 5 years. The SIP of Rs.10,000 would not be adequate to average out the losses from a 10% drop in the markets.
Fund Management Risk
Another risk associated with SIP is that the chosen schemes may not live up to the expectations, and profitability may be significantly lower. The Fund Manager may under-deliver on efficiency, resulting in poor SIP investment returns. While we could discuss other risks in SIPs, such as economic risk, most of these risks would fall into one or more of the categories listed above.
Though there is a risk associated with SIPs, it is important to realize that SIPs or lump sum investments are only a method of investing, not the underlying investment. The underlying investment, as well as its hazards, must be considered before making a final choice.
SIP is, without a doubt, one of the most effective techniques for investors to achieve their investing goals. Calculating the correct sip quantity is also necessary to reduce the investment’s risk. Individuals should always use sip calculators to estimate the SIP value depending on their investing goals. Also, keep an eye on the market from time to time to stay up to speed on the worth of your existing investment.