Is SIP Safe?

While SIPs provide a disciplined approach to investing, it is important to recognise that they are not immune to market risks. Read the article to explore more.
Is SIP Safe?
3 mins read
10-Apr-2024

A Systematic Investment Plan (SIP) is a method of investing in mutual funds in the financial market. It is a convenient alternative for lump sum investments, which require a huge capital outlay upfront. However, a common concern among mutual fund investors involves doubts about the safety of SIPs. So, is a SIP safe? What are the risks linked to SIPs?

These are some of the questions we attempt to answer in this article.

Overview of SIP?

A SIP is a method of investing small sums periodically in the mutual funds of your choice. The amount of periodic investments is typically fixed, although it is possible to invest increasing amounts via step-up SIPs.

A SIP investment differs from a lump sum investment in mutual funds because you can distribute your SIP investments over several months or years. This is different from making a one-time lump sum investment in mutual funds.

SIPs offer many benefits for investors. However, many beginners tend to wonder if a SIP is safe. Let us explore the answer to this pressing question.

Is SIP safe for investors?

A SIP is generally considered a safe way to invest in mutual funds. This is because they spread the risk over the entire investment tenure instead of concentrating it at the beginning of the investment period.

What this means is that if you invest a lump sum amount in mutual funds today, the risk of your investments losing value if the market declines is significantly high. However, if you opt for a SIP, your investment costs are distributed across different market cycles. This effectively averages out the cost of your investment over time. So, you can benefit from upward and downward trends in different ways.

For instance, in a bullish market, you may buy fewer units because the price of the asset could be rising. However, in a bearish market, you may buy more units in the fund because the prices are dropping. This irons out the impact of market volatility and gives you the benefit of rupee cost averaging — which is why a SIP is a safer investment option than a lump sum investment.

Risks associated with SIPs

Although a SIP is safe, it is not entirely risk-free. So, before you start a SIP in the mutual fund of your choice, you need to be aware of the risks involved. Do note that most of the risks listed below are not entirely tied to the SIP itself, but often stem from the mutual fund schemes or the market in general.

  • Market risk: SIPs invest in stock markets or bond markets, which can be quite volatile. Market fluctuations can affect the value of the fund and lead to potential losses.
  • Performance risk: This is the risk of the chosen fund not performing well (or as well as expected). This may impact the returns from your SIP investments.
  • Interest rate risk: Interest rate risk primarily pertains to SIPs in debt mutual funds, whose values may fluctuate based on changing interest rates.
  • Liquidity risk: SIPs in funds whose units are difficult to redeem may pose liquidity issues. If it is not easy to sell the mutual fund units, you may be unable to access your capital quickly.
  • Credit risk: For SIPs in debt funds, there is a risk that a bond issuer may fail to repay the debt. This is known as credit risk.

Benefits of SIPs

Despite the above risks, which are tied to the type of funds or the market in general, the strategy of starting a SIP is safe for investors as long as the due diligence is done. Additionally, SIPs also offer various benefits, as outlined below:

  • SIPs promote regular investing and foster financial discipline over time.
  • The benefit of rupee of cost averaging reduces the impact of market volatility for long-term investments.
  • SIPs make mutual fund investments safe and affordable for retail investors as there is no need for a lump sum amount upfront.
  • SIP investments also offer the benefit of compounding, which can accelerate your journey towards wealth creation.
  • With SIPs, you do not need to time the market and identify accurate points to begin or redeem your investments.
  • Your investments are spread out over several market cycles, thus reducing the risk.
  • SIP investments are flexible because you can choose the amount, frequency and mutual fund you wish to invest in.
  • Regular investments via SIPs can help you meet your long-term financial goals.

Conclusion

This should give you more clarity on whether or not a SIP is safe and how you can make the most of your periodic investments in mutual funds. The risk-reward equation of your SIP depends largely on the types of mutual funds you choose to invest in. So, it is always a good idea to compare mutual funds and identify the schemes that align with your risk and return preferences.

The Bajaj Finserv Mutual Fund Platform can help you with this. With over 1,000 mutual funds available for investors to choose from, starting a SIP in a suitable fund has never been easier.

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Frequently asked questions

Is a SIP safer than an FD?

If you are wondering whether a SIP is safe when compared with a fixed deposit, you should know that they each carry different types of risks. SIPs may be risky if you choose equity funds and less risky if you choose debt funds.

What are the disadvantages of SIPs?

SIPs may be exposed to market risks. Additionally, SIP investments in mutual funds may also carry added costs like entry or exit loads.

Can my SIP result in a loss?

Yes, if the market moves in an unfavourable manner or if the values of the assets in which you invest decrease with time, your SIP could result in a loss.

Does a SIP guarantee returns?

SIPs do not offer any guaranteed returns. The returns from a SIP depend entirely on the type of mutual funds you invest in and the dividends and/or capital gains they offer, if any.

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