As a conscious, smart investor, you should be aware of all the factors and risks associated with your investments. While there are tons of articles about the benefits and advantages of investing in SIP, not much is provided about the risk factor associated with SIP investments. This article will help you out with the same. First, let’s recall what an SIP is.
What is SIP?
SIP, or systematic investment plan is an investment vehicle offered by financial institutions to the investor to invest in mutual funds in a systematic manner. Under the SIP investment, an investor invests a fixed amount for a specific period of time in their desired schemes.
Following are some of the risk factor associated with SIP investments:
- Depreciating value of the investment
When you make an SIP investment, there is a monthly deduction of funds from your account, which is used towards mutual fund investments of your choice. However, as you are unaware of the funds’ inner workings and areas in which your mutual fund investments are circulating, you stand the risk of depreciating the value of your investments over time. This could be because the underlying equity failed to perform or the fund is losing money. As a result, you might end up with lesser money in hand than you invested, resulting in a loss.
- Liquidity risks
You might make SIP investments on a monthly basis which might not seem a significant amount at a time. However, when the time comes to sell your investments and withdraw from the scheme, you might face challenges while selling. Low-performing funds are difficult to sell in the market and could result in your mutual fund investments being locked in.
- Currency and foreign investment risk
Some mutual funds make heavy investments in foreign and currencies investment. As long as the currency value appreciates, and the foreign investments remain, there is no need to worry. However, if either fails and in most cases, one could affect the other, the entire mutual fund would cave in, resulting in a deficit and possibly no returns or even negative returns for the investor.
- Market and policy changes
One of the biggest threats to free-market investments is frequently changing projections and fluctuations in the stock market value based on policy and political reforms. Drastic changes in either of the two could threaten the goodwill of the market and also result in significant losses.
- Hidden charges and fraud
While there are hardly any hidden charges and fraud in SIPs, there is still a slight chance of financial fraud. As you are not managing your investments on your own, which is passed through several middlemen, there is a slight possibility that your investments might get duped or you could be cheated out of the gross profits you earn in the name of hidden charges and/or other fraudulent practices.
SIPs offer the most convenient way of investing in mutual funds, but due to the nature of mutual funds possessing some risks, the same applies to SIPs as well. Hence, it’s a good practice to consult experienced consultants and understand the nature of your investments before you invest in SIP. You can also use an SIP calculator to understand the returns on your investments. An SIP return calculator can also work backwards, and let you know the required amount to invest to reach a particular corpus. Happy investing!