A Systematic Investment Plan (SIP) is an effective way of investing in mutual funds(MFs). It eliminates the need to regularly time the markets while systemically building your wealth and assets.
The fund management companies invest your money in diverse instruments like debt, equities, bonds, corporate securities, etc. And as with any market-linked investment vehicle, SIPs also come with certain risks.
To become a well-informed investor, have a look at some of the risk factors involved with making an investment through a SIP.
Risk of liquidity
Liquidity risk involves delays in getting back your investments. Typically, this problem occurs when the sale volume outweighs the number of security buyers in the market. As a result, sellers find it difficult to redeem the investment money to you.
Moreover, there can be schemes with a fixed lock-in period during which you cannot sell your investments. It’s also hard to sell low-performing MF units in the market, resulting in your money being stuck.
You’ve probably heard it countless times – ‘Mutual funds are subject to market risks’. The constantly changing market trends and price volatility directly affect a SIP’s Net Asset Value (NAV). A sharp rise in the market leads to profits while a fall signifies losses.
Several factors influence this price risk including interest rate variations, inflation, natural disasters, policy reforms, inflation, political activities, etc. Generally, the chances of earning profits increases proportionally with your holding period; i.e. the risk is lower when you invest for a longer period.
Additional Read: How to Top up Your SIP
Your MF portfolio value may also get exposed to credit risk. The value of underlying security falls if it faces a downgrade by a credit rating agency. Therefore, it negatively affects the overall value of your portfolio.
Depreciating investment value
Another risk factor of losses in SIPs arises when a scheme does not yield the expected returns. Your investment might depreciate with time if an MF has invested in underperforming securities and losing money. Thus, you will ultimately redeem lesser money than you had initially invested.
You can assess the fund management risk by looking at the past performance of an MF scheme. To plan a safer investment, you must do a SIP returns calculationbefore opting for a certain plan.
As most of the transactions take place electronically, there’s always a risk of failed transactions at multiple touchpoints. Although the non-processing issue is rare and can be resolved, it can still cause stress and loss of funds if not dealt with promptly.
Additional Read: Why are SIPs an Ideal Choice for the First-time Investor?
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