By An SIP (systematic investment plan) is a prudent route to invest in the mutual fund of your choice. It removes the requirement to periodically time your market investments while systematically forming your assets and wealth over the long term. However, like any market-linked investment option, an SIP also comes with some risks. Here are the important risks associated with SIP investing.
Averaging does not work when the corpus is growing
Rupee cost averaging is one of the important benefits of an SIP investment. However, the rupee cost-averaging feature may not be beneficial if the market is constantly rising. For instance, let’s assume you conduct a monthly SIP in an equity mutual fund with an amount of Rs 5,000 that mostly purchased lower units over time due to the constant bullish market. Now, if the market witnesses a bearish phase of 10 per cent, then an SIP of Rs 5,000 would not be adequate to average out your losses from this fall. One of the best ways to combat the risk is topping up your SIP in bearish phases. Doing so would allow you to purchase a higher number of quality units at lower value during falling markets. Over time as the time recoups, the value of your bought units would grow over time generating higher returns during bullish phases.
Involvement of point-to-point risk
Equity is volatile in nature. While the SIP mode allows you to reap the benefits of equity markets through the investment of predetermined small amounts of as low as Rs 500, it does not assure a fixed return by the end of the investment tenure. So, if a specific investment is performed keeping a particular investment goal in mind, it does not mean you will derive the desired return over the investment horizon. For instance, suppose you began SIP mutual fund investment to meet a particular financial goal after 15 years from now. However, by the end of the 15th year, if the equity market falls, then your overall corpus requirement may not be fulfilled. So, you must not remain invested in equity until the end of the investment horizon. You must instead start shifting your equity investment in an SIP to debt investment bit by bit once you are two to three years away from your investment horizon. Doing so prevents your returns generated in equity investment through an SIP from getting eradicated owing to the market volatility. Moreover, by shifting to the debt fund, you get the benefit of capital preservation and at the same time generate satisfactory returns of more than fixed deposits or recurring deposits over time.
Opportunity loss when markets are falling
Markets aren’t unidirectional. Consequently, they provide you with ample opportunities to take part in a gainful manner. Correction of the stock market often endows you with the opportunity to invest in good companies’ stocks at a compelling valuation. In such a case, a lumpsum investment may be more advantageous than an SIP. Here in this case, the solution is when equities are available at a compelling valuation, you can consider increasing your SIP amount.
Although mutual fund SIP is a safer and more convenient option than lumpsum investment, it has its share of drawbacks too, which you can manage by following the suggestions mentioned above.
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