SPIs are systematic investment plans that beginner investors consider primarily because of the low level of risks they carry. These plans are offered by various financial institutions, but not all of them can meet the specific needs of every investor. It is therefore essential for an investor to understand the various risks and rewards associated with these funds. This understanding will help an investor make an informed decision regarding their funds. This article discusses some of the major risks associated with investing in SIPs and some of the decent SIPs that can be considered by a person.

Risks associated with investing in SIPs

SIPs are risky investments which require well-defined research to be carried out on the various risks attached to these investments. This understanding will help you decide which SIPs suit your needs.

Portfolio underperformance

When you decide to invest in SIP they should know that there is no guarantee that the wallet will only perform at par. There can be various reasons why the portfolio may underperform and an investor should be prepared for this. This underperformance may be due to reasons such as a specific sector is not performing well or any other reason. Additionally, if a portfolio performs below the level of its benchmark, this may also require changes to the portfolio.

Liquidity risk

Another risk of investing in SIPs is liquidity risk. Investments made in equity-linked funds are less liquid as they often include a lock-up period. A lock-up period does not allow the investor to withdraw money from the investment until a specific period of time. This reduces liquidity and does not allow access to funds which could have been invested elsewhere for better performance.

Low short-term returns

One of the risks of investing in SIPs is that they may offer low returns in the short term. This is why it is advisable to invest in them for longer periods as they offer better returns during these periods. These investments generated low or negative returns when invested for 3-5 months due to market fluctuations. This creates a risk of wasting funds if withdrawn too quickly.

Ways to deal with these risks

Investments made by investors in SIPs involve various risks. This is because SIPs are ultimately a type of investment that invests a certain amount of funds in stocks. These actions involve various risks that must be managed to get the most out of these investments.

Portfolio diversification

One way to manage SIP risks is to choose an SIP that offers a combination of equity and debt. This combination offers the possibility of diversifying the risks attached to investments. This diversification of risks helps maximize returns. E.g. A low-risk taker may invest more of his funds in debt securities and less in stocks.

Investing for the long term

To enjoy the power of compounding, it is essential to stay invested in SIPs for longer durations. Indeed, the longer you stay invested, the more you avoid short-term fluctuations and benefit from market recoveries. A long-term approach to SIP investing helps mitigate the risk associated with market volatility.

Regular review

It is essential to review your SIP investment frequently as it helps you understand how your portfolio is performing in various market conditions. It also helps you realign your investments according to your times and financial goals.

An investor may choose to invest in debt securities if he wants to achieve certain short-term goals, like planning a vacation, etc. Alternatively, if an investor wants to achieve long-term goals like buying a home or planning for retirement, they need a solid investment product. This can be achieved by investing in the stock market, as they have been proven to generate significant returns in the long term.

Conclusion

Investing in SIPs is considered a safer investment compared to other investment alternatives available in the market. This is not entirely accurate, as these investments often carry certain risks. These risks include market volatility risk, liquidity risk, low short-term returns and portfolio underperformance. There is no need to worry about these risks if you know some of the ways to deal with them. These methods include building a portfolio based on your risk tolerance and portfolio diversification. Apart from this, one should consider making these investments from reputed platforms like Tata Capital to protect oneself from any fraud, this also helps one get the most out of one’s investment.

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