Are SIPs Really Risk-Free to Make Money?

June 21, 2017

SIPs, or Systematic Investment Plans, are the best way to invest your money on a long term basis. With so many interesting investment portfolios available, it becomes hard to resist the urge to invest your money. When you are getting such lucrative returns, you end up investing your hard earned money. But, are SIPs worth investing? Are these investments risk-free?

Remember, building an ideal mutual fund portfolio requires planning. It is necessary that you consider all factors that have a chance of reducing volatility and lowers the tax burden. Often, investors do not consider the factor of risk as the risks get faded in the brightness of returns. No doubt, returns on SIP’s are calculated using the compound interest. In the long term, you get tempting returns. And for this, you just need to invest a fixed amount at regular intervals. Let us analyze the risk factors associated with SIPs.

Price Fluctuations

This is the most common risk associated with SIPs. You must have heard the statement : Mutual Funds are subjected to market risks… As the market keeps on fluctuating, the market prices of the equities also keep fluctuating. This is the reason SIP’s are generally planned for longer durations. The long tenure ensures that the risks are drastically reduced. But, the risks are always there.

Liquidity Aspect

The liquidity in the equity market is maintained when the buying and selling of invested instruments are in equilibrium. Now, consider the scenario when there is a demand and supply gap. There are too many equity instruments but very few buyers. This would inhibit the liquidity in the market. In this case, your investment may be subjected to the risks. In order to keep the prices on the safe side, the liquidity should be maintained.

Credit Ratings

The value of the company is dependent on various factors. Credit ratings are one of these factors. The credit agencies rate the companies on the basis of their performance and monetary value. When an agency undermines the company by reducing the credit ratings, the price of the equity falls down. In this case, an investor may suffer loss. This is one of the risks associated with SIPs.

Default Risks

This is an understood risk. When a company fails to pay the shareholders, it comes under the category of the defaulter. Therefore, when you are investing in equities, you should carefully study the company’s performance. If the financial background of the company is not strong, avoid investing in the company. Default risks are seldom but they still happen.

Fund Management Risks

If you don’t have sound knowledge about the investments in SIP’s, you should consider opting for professional services. This way, you reduce the risks associated with your investments. But, sometimes, a fund manager can also commit mistakes. In this case, fund management risks are always involved. When a manager is not experienced enough, these cases come into the limelight.

Technological failure

You can always play safe but you cannot control, or predict, circumstances. This is true in the case of technological failures. During a transaction, it is possible that technological blunders occur at the R & T Agent or during the debit process. These issues are very rare. But, you never know about the technological aspect.

Currency Fluctuations

Last but not the least, currency fluctuations determine the value of the share. If a currency witnesses depreciation with respect to another currency, you may suffer losses if you invested in the latter currency. You require a deep understanding of the economy to forecast the market conditions. Still, you can predict the accurate scenario. As you see, SIP’s are not risk-free. But yes, these risks are dwarfed by the tempting returns on the long-term investments.