Is SIP a Safe Investment Option?

SIP is regular and systematic investment plan wherein an investor invests a particular amount usually a small sum at regular intervals. This amount is invested in the equity market regularly. SIP is one of the most convenient methods of investing where a small amount is debited from your bank account through Electronic Clearing Services (ECS) on a particular date and is invested accordingly. Over a period of timethe investment generates handsome returns and a healthy ROI. But there many obvious questions that arise especially when SIPs involve investing an investor’s hard earned money in the stock markets like what about the fluctuations and volatility of the market and how will it affect my investment? These are very genuine questions that need to be answered before one can take the plunge and invest in SIPs. With SIPs it is of great importance to compare the different possibilities in advance and to evaluate the long-term consequences of your investment.

SIP and safety of investment

SIPs are deemed as a safe or rather the safest way to invest in the equity market by financial planners and mutual fund companies alike. With SIPs instead of a heavy one timeinvestmentaninvestors invests small amounts regularly this feature also helps to minimize the risk factor. Understanding the operation or the logic of SIPs is simple, because it consists of investing in a methodical way, following certain rules and investing in a controlled manner. Add to that both mutual fund companies and banks that offer SIPs are regulated by government of India through Securities and Exchange board of India (SEBI). Any product or potential return a financial company can offer you have to be firstly approved by SEBI. Not to mention regular audits and more. What also helps in risk-management is that the portfolio of investment is prepared by the best in the industry after thorough multistep process involving analysis, recognizing of opportunities and risks, forecasting and much more.

Making wealth using SIPs

Making money in the equity market requires a trading plan with clear objectives, an analysis of the situation and the probabilities of investment. Worse nothing of this can be achieved without a discipline, regardless of the volatility or stability of the market. This can be done by a trained and experienced professional better than a layman. So, do all these factors make investing in SIPs a risk-free preposition? Well they definitely minimize it but do not eliminate them. There are many other advantages of investing in SIPs like average price effect which also minimize the risk factor. SIP funds are subject to price fluctuations depending on the market price of the investments resulting from them. By regular payments through the fund investment plan, when prices are high, a smaller amount of units of the investment fund are purchased. This quantity becomes higher when prices are low. The average price effect offsets price fluctuations and reduces the risk associated with an unfavourable underwriting moments. Thus with a fund investment plan, you can build a long-term wealth.

Risks-management and SIPs

Risks associated with SIPs can be equated directly with the holding period. It is believed that the longer you invest in SIPs the lesser the risk associated becomes. It is stated that for any SIP plan if an investor holds his investment for three to five plus years he will most likely never make a loss or get a negative return. Also depending upon your risk taking ability you can invest in a SIP plan of your choice. There are low risk plans that deal in debts funds or liquid funds or when in the portfolio is really diversified. But returns on these SIPs will be conservative the SIPs that deliver highest returns fall in the highest risk bracket too. With SIPs the returns which you will make on your investment may vary but seldom there would be a negative return. But scenarios such as a calamity or a global depression where markets of major economies stay in red for a really long period of time can change rules of the game.