Systematic Investment Plans or SIP are one of the best ways to invest in equity markets. They’re increasingly becoming popular among investors because of their significant advantages. You can choose how much you invest based on your needs and earnings. You can stop whenever you want to or need to. You can benefit from rupee cost averaging and compounding, and you have exposure to the asset class of your choice systematically and more. However, every medium of investment has its share of challenges you have to be mindful of so you can mitigate risks and reduce their impact.
Here are some of the risk factors involved in SIP:
1. Averaging doesn’t work efficiently when your corpus grows
One of the advantages of rupee cost averaging is minimizing the guessing game. Irrespective of the price per unit, with SIP, you periodically invest a certain sum of money. This gives you the advantage of investing across both the down-market and upmarket. However, in the long term, the benefit of rupee cost averaging may moderately dwindle as your corpus grows. For instance, you invest INR 10,000 monthly for 5 years, which grows to INR 6 lakhs. If there was a 10% fall in the market, INR 10,000 is insufficient to average out the losses from the fall.
2. Point-to-point risk
Although SIPs let you participate in the equity markets of mutual funds in India, they cannot assure you of fixed returns. While initially, there’s a possibility you’ve accumulated sufficient funds, but there are chances of that amount depreciating at the end of your investment period. It would help if you kept in mind that uncertainty is the nature of equity investments as you’re investing with a specific goal in mind.
3. Opportunity loss when markets are cheaper
Stock markets are multidirectional. With the availability of mutual funds online, investors can invest in different avenues to gain more. Sometimes, due to market volatility or with stock market corrections, investors get the chance to invest in solid stocks at attractive prices. In such situations, as opposed to SIP, lump-sum investments come in handy.
4. Negative return or price risk
You’ve heard it time and again – mutual funds are subject to market risks. Essentially, this means that depending on how the market behaves, your SIP investment can decrease and may end up with less than what you invested.
5. Lack of knowledge
With SIP, you can invest in varying time frames and in all kinds of funds. Simply investing doesn’t guarantee returns. Many people start SIP with little or no knowledge and on the word of others. This approach is incorrect and can lead to losses.
To gain returns, you need to ensure you’re investing correctly in the appropriate funds for your needs. Don’t let the disadvantages turn the other way from SIP. With the right investment app like Moneyfy by your side, you can make SIP work to make good returns and mitigate your losses.