Systematic Investment Plan (SIP) has become one of the most common ways of investing in Mutual Funds by people in India. Whether it be a youngster or an amateur investor, the majority of people opt for SIPs since it gives them the benefit of investing a fixed amount of money instead of making a lump sum payment in the market. However, the most common question that arises among them is: “Is SIP Safe?” While SIP can be considered a disciplined and convenient method of investing, yet it cannot be said that SIP is absolutely risk-free. SIP is a process of investing a fixed amount periodically in a mutual fund scheme. The safety of the investment depends entirely upon the mutual fund where the money is being invested.
What Exactly Is an SIP?
Investors are able to put in a certain sum of money in the mutual fund on a periodic basis via SIP, which can be done on a monthly basis, and other than this weekly or quarterly SIP can also be possible. The investors rather than trying to put in a lump sum amount of money at the “right” time keep putting money on a periodical basis in any case. When markets are down, the same investment amount may purchase more mutual fund units. When markets rise, it may purchase fewer units. Over time, this process is commonly known as rupee-cost averaging.However, this does not mean that an SIP guarantees profit. The value of the mutual fund investments may either increase or decrease based on how well the securities that are in the fund perform. Investors can also lose part of their invested capital, depending on the market and the type of fund they choose.
Why Do Many Investors Consider SIPs Safer?
One of the biggest advantages of an SIP is that it encourages regular investing. A person does not necessarily need a large amount of money to begin. AMFI says SIPs can start with relatively small monthly amounts, depending on the scheme and investment facility. This makes them accessible to many new investors.Another advantage is that SIPs can reduce the risk of investing all your money at one particular market level. If an investor invests a lump sum just before a market decline, the entire amount may immediately experience a fall in value. With an SIP, investments are spread over time.Mutual funds also generally invest in a portfolio of securities rather than just one stock. This diversification can help reduce the impact of poor performance from a single investment, although it cannot eliminate overall market risk. Mutual funds in India operate under the regulatory framework of the Securities and Exchange Board of India, or SEBI.
What Are the Risks of Investing Through SIP?
The most important thing investors should understand is that an SIP itself is not a guaranteed-return product. The risk depends on the mutual fund scheme selected.For example, equity mutual funds invest mainly in stocks and can experience significant price fluctuations. Debt funds may have different risks, including interest-rate and credit-related risks. Hybrid funds combine different asset classes and may carry a different level of risk. SEBI’s Riskometer is designed to help investors understand the risk level of a mutual fund scheme before investing.Market conditions can be affected by several factors, including economic developments, interest-rate changes, government policies, political events and movements in stock and bond markets. Past performance is also not a guarantee of future returns.Therefore, investors should not choose a fund simply because it delivered high returns in the past. The fund’s objective, risk level, investment strategy and suitability for the investor’s financial goals should also be considered.
How Can Investors Make SIP Investing Safer?
The first step is that it is necessary to know where you are investing your money. The investor needs to verify the category of the fund, its risk level, and its objectives before starting SIP in a particular fund. Selecting a mutual fund based on its popularity or good performance in the past may not always prove to be a wise choice. Investors need to ensure that they choose an investment avenue depending on their financial goals and risk tolerance level. A long term investment period will make sure that the investors do not get distracted when faced with market volatility, but it doesn’t guarantee that there will be no losses at all.
So, Is SIP Safe?
While one could say that SIP is a disciplined and structured form of investing in mutual funds, calling it completely safe is a little incorrect. Using the SIP technique will enable the investor to make investments on a regular basis and will help them escape from the pressure of timing the markets and instill discipline. Nonetheless, the fact that the investor makes investments through a mutual fund scheme means that their investment will always have market risk. For the investor, what is important is not to question whether all SIPs are safe or not, but whether or not the chosen mutual fund is appropriate for him/her.