Is SIP Safe Is SIP Safe

Is SIP Safe for Mutual Fund Investors?

If you’ve been investing in other instruments or want to get into mutual funds, the question “Is it safe to invest in SIP?” is a fair one.

To get the answer to your question, you need to first understand the meaning of SIP and the benefits it offers. 

That’s what we will walk you through in this blog, starting with the basics of SIPs to evaluating the investment methodology as a whole. 

What is SIP in Mutual Fund?

SIP or Systematic Investment Plan is a consistent method of investing in different types of mutual fund schemes. It allows you to invest a chunk of money at regular intervals into a mutual fund of your choice. 

Using a SIP to invest in mutual funds helps you create a routine and develop a habit of investing consistently, come what may. 

The regular intervals are of your choice, ranging from weekly to quarterly or even bi-annually. Once set, your SIP can be automated with an OTM or One Time Mandate which is deducted from your bank account by a standing instruction.

Once the payment has been deducted, it is invested in the mutual fund of your choice, and scheme units are allotted based on the mutual fund’s day-end Net Asset Value (NAV).

You can start or discontinue your SIP at any moment, and also pause your SIP if you are running low on cash.

Benefits of SIPs

Here are the reasons why you should select SIPs for your investment needs:

1. Disciplined Investing

SIPs promote consistent and disciplined investing. You acquire the habit of investing consistently by investing a certain amount at regular periods, generally monthly. This strategy helps avoid impulse investing decisions driven by short-term market changes.

2. Flexibility and Affordability

SIPs provide flexibility and allow you to invest in different investment amounts. You might start modestly and gradually raise your investment as your financial circumstances allow. This makes it easier for people with various income levels to join the financial market.

3. Professional Fund Management

The invested funds in SIPs are handled by professional fund managers who are specialists in market analysis, investment selection, and portfolio management. This expert management can help you in managing your portfolio, especially if you lack the time or knowledge to actively manage your money.

4. Rupee Cost Averaging

Rupee cost averaging is an important safety factor in SIPs. Since the investment amount is predetermined, while markets are high, fewer Mutual Fund units are purchased, whereas when markets are down, more units are purchased. 

This technique is referred to as rupee cost averaging. This method reduces the impact of market swings and the risk associated with market timing.

5. Diversification

SIPs allow you to diversify your investments across many mutual funds or asset classes. 

You may reduce the risk associated with investing all of your money in a single investment option by spreading it out among a variety of funds.

Trends in SIP Mutual Funds

As the nation becomes increasingly aware of concepts such as financial freedom and passive income, investors are taking investments seriously. 

One of those serious investments, as you may have guessed, is SIP mutual funds. The mutual fund industry’s AUM hit Rs 50 trillion in December 2023.

Just ten years ago, that number was just Rs 7 trillion. The whopping growth is promising, and SIPs have been at the forefront of this growth. 

SIPs contributed Rs. 10 trillion at the end of 2023, with equity schemes being the preferred haven for systematic investments. 

One could attribute multiple reasons for this growing trend of SIP investments. Easy access to commission-free mutual funds on platforms such as Dhan and awareness campaigns by market authorities are at the heart of it. But…

Is SIP Safe for Mutual Funds Investors? 

Whether SIP is safe or not depends on various factors. Your SIPs are as safe as your measures to protect your capital.  That said, there are intrinsic risks associated with any mutual fund investment as follows: 

1. Market Risk

SIPs are exposed to market volatility as they invest in mutual funds, which allocate money to various financial products including stocks and bonds. 

The performance of these underlying assets is influenced by market volatility. 

However, the systematic and regular investment method of SIPs, through the idea of rupee cost averaging, helps minimize the impact of short-term market volatility.

2. Economic and Market Conditions

Inflation, interest rates, geopolitical events, and economic policies all have an impact on mutual fund performance. 

While you may have no control over these external factors, remaining updated about economic trends and market circumstances can help you make better decisions about your SIP investments.

3. Investment Horizon

SIPs are useful only if you invest for a longer period. While short-term market changes might result in temporary losses, the long-term nature of SIPs helps you through these ups and downs. 

Historically, the stock market has shown an upward trend over long periods, and investing for the long term through SIPs can potentially yield favorable results.

4. Liquidity

SIP Mutual funds could present liquidity risks under specific market conditions. Liquidity is the ease with which an investment can be acquired and sold in the market. 

While mutual funds are generally liquid, specific securities in the fund’s portfolio may experience liquidity issues. However, professional fund management and regulatory monitoring work to address and mitigate such risks.

To guarantee a safe and rewarding investment journey, you should approach SIPs with a clear understanding of your financial goals and risk tolerance, as well as a commitment to regular assessment and modification.

Conclusion

SIP is known to be one of the best methods to achieve your investment goals and provide a planned and disciplined approach to mutual fund investment. 

With benefits such as consistent wealth creation and rupee cost averaging, SIPs have the formula to set you up for success. 

The overall safety of SIPs depends on your choice of mutual funds and your approach to investing, in general.