How Do Sips Help In Mitigating Investment Risk

Published On: 11-Sep-2020

If you are looking to invest in mutual funds, you may recall the standard disclaimer, “Mutual fund investments are subject to market risks.” Since the mutual funds invest the money in a basket of securities across equity and debt etc. depending upon the fund type, the investors do get exposed to certain investment risks. Even though eliminating such investment risk may not be practically possible, one can plan about how to minimise risk in investment. Investing in mutual funds is an important step towards mitigating investment risks, as the investments are managed by professional fund managers wherein the investment decisions are taken after thorough research and analysis.

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While the investors generally perceive negative returns or even insufficient risk-adjusted returns as the primary risk, such probability can be mitigated through regular investments across the market movements. This is where Systematic Investment Plans (SIPs) come to the rescue of investors. With SIP, one can make periodic investments in mutual funds irrespective of the market condition. SIP is a process for a disciplined investment of a certain on a pre-decided date in a specific mutual fund scheme, regularly over a period of time.

SIP benefits the investors in terms of averaging the cost of investments over time. So, the investments made at higher valuations get averaged along with the investments made at lower valuations. Further, with regular investments, SIP helps the investors to accumulate a healthy investment corpus over time. As the investing process is automated after the SIP registration, the emotional bias in investing due to market movements gets eliminated. The investors must realise that while SIP is not an investment product in itself, but it is just an investing strategy. However, systematically approaching your financial goals through SIPs indeed helps in risk reduction and wealth creation in the long run.

SIP has been effective in steering through market volatility. No wonder retail investors prefer investing in markets through SIPs. The monthly SIP inflows had been over Rs. 8,000 crores from Dec-2018, before it peaked at Rs. 8,641 crores in Mar-2020, however, inflows post COVID-19 meltdown has hurt the sentiment of retail investors, thereby increase in the number of cancellations. This has led to slowdown in monthly inflows, while the it stood at Rs. 7,831 crores in the month of July 2020. (Source – AMFI) 

As such, SIPs can be instrumental as rupee cost averaging works for the investor in diverse market cycles enabling the investors to stay on the track of long-term wealth creation. Take your first step towards your financial goals right away.