Download CRED
4 risks to consider for sip investments

4 risks to consider for sip investments

sip investment is an ideal tool for building your assets and wealth with minimal amounts. it eases the risk of losses while facilitating a disciplined investment habit, which could bring great results.
February 11, 2021
4 min read
share facebookshare twittershare linkedinshare whatsapp
4 risks to consider for sip investments

4 Risks to consider for SIP Investments

share facebookshare twittershare linkedin

a systematic investment plan (sip) offers a good return. still, certain risks are associated with it as the sip companies invest the money in different financial instruments, including corporate securities, equities, government bonds, debt, etc. their value keeps fluctuating owing to the changes in various factors such as price volatility, fluctuation, and performance of the assets. it is therefore essential to determine the risks before investing in a sip.

 listed below are some significant risks associated with sip investment, affecting the scheme's market value. let's have a look.

1. risk associated with market activities

"mutual funds are subject to market risks" – you'll always find this one-liner in every mutual fund/sip advertisement. even the slightest fluctuation in the market affects the net asset value (sip's market value), resulting in investors' loss. a good performing market signifies profits and vice versa.

 several factors affect the market situation, such as interest rate fluctuation, natural disaster, recession, inflation, political activities, and others. portfolio diversification isn't an ideal solution to mitigate market or systematic risks. the best way is to be patient and wait for the market to become stable. plus, always use the sip calculator before investing your money in a scheme.

2. risk of liquidity

an asset's liquidity risk is the difficulty level of redeeming an investment but with no losses on the investment value. generally, trouble occurs where sellers cannot find security buyers. hence, it becomes difficult for the sellers to redeem the investment money to the investors.

liquidity risk also prevails in the schemes with the provision of a lock-in period. portfolio diversification is the best solution to deal with such risk factors. also, investors should be diligent when selecting the plans. use the sip return calculator to ensure safe investment.

3. risk of portfolio concentration

investing all your money in one portfolio isn't a smart way to support it. if you are lucky enough, you could gain huge profits, but don't forget the losses could be equally high. maintain a diversified portfolio for minimizing the risk level. the more diversified your portfolio, the lower will be the risk of loss. always use mutual fund sip calculator when selecting the plans. most importantly, read all the sip related documents carefully before signing on the 'dotted line.'

4. interest rate change risk

interest rate fluctuation might affect the investor's sip profit. growth in the economy means a high-interest rate, and downturns mean a fall in the rates. know that rate of interest and the price of the bond go in the opposite direction. higher interest rates mean lesser bond value. therefore, it is best to check the plan's past performance, current interest rates, and market situation to determine its value.

final takeaway   

sip is indeed one of the best ways for the investors to meet their investment objectives. calculating the exact sip amount is also crucial to ease the risk associated with the investment. based on their investment goals, individuals should always calculate the sip value using sip calculators. also, keep tracking the market situation from time to time to stay updated on your current investment value.