Investors seeking long term capital appreciation with moderately high risk appetite can consider investing in mutual funds. Mutual funds are a modern investment tool which collects money from investors sharing a common investment objective and invests this pool of funds in various asset classes including equity, debt, government securities, corporate bonds and other money market instruments.
There are two ways in which investors can invest in mutual funds, either through lump sum or SIP. Lump sum payment is ideal for those who have a surplus amount parked in their bank account and wish to invest this amount for better gains. In lump sum payment, the investor pays the premium at the beginning of the investment cycle.
Systematic Investment Plan or SIP is a systematic approach where an individual can give their investments a disciplinary touch through systematic and regular investing. SIP is an electronic payment process where all an investor needs to do is instruct his/her bank and every month, on a predetermined date a fixed amount is debited from their account and transferred to the mutual fund account.
SIP investments are the best way for anyone who wants to inculcate the discipline to save regularly. If you wish, you can also buy SIP online. The best part about SIP is that you can start investing with an amount as small as Rs. 500 per month.
However, there are certain things for investors to keep in mind while investing in SIP. Building your mutual fund portfolio is one thing, but avoiding mistakes and managing risk is an entirely different aspect. Here are a few steps to avoid risk in SIP investments.
- SIPs do help in averaging out costs, but this doesn’t necessarily mean that SIP investments will all give investors positive returns. If the market performs well, SIPs will give good results, but if there is a downfall in the performance of stocks, there is no way for SIPs to overcome losses. To avoid losses, it is advisable that investors keep periodic checkups and compare their fund’s performance with other funds in a similar category.
- Technically, there is no such thing as SIP giving good returns or bad returns. Either the fund you invested in through SIP is underperforming or outperforming. If your fund has been underperforming for a long time, it is better to redeem your units and invest them in another fund. If you wait for too long, there are chances of you losing out on your initial investment also.
- SIP investments in mutual funds are exposed to market volatility, making them a high risk investment. Hence it is better that you identify your risk appetite and also understand what type of investor are you before investing in mutual funds through SIP. If you are more of conservative types who do not wish to exposes their finances to the vagaries of the market, it is better than you reconsider investing.
- No investment is risk-free, and investors should be ready to bear losses, especially when the market becomes extremely volatile. The sensible thing to do here for investors is to invest within their boundaries and avoid over investing. That last thing you want is to become bankrupt and hence, always have a diversified portfolio and avoid investing beyond your risk appetite.
If you are investing in mutual funds through SIP, make sure that you have a long term investment horizon. That’s because equity investments tend to outperform only when held for the long term. If you have a short term investment objective, SIP investments might not be ideal for you. It is better that you look for other investment options rather than banking on SIP to get you closer to your ultimate financial goal.
These were some of the things every investor should keep in mind if they have to avoid risk in SIP investments. Make sure you stick to an investment strategy and do not drift away from it. It is only then that you stand a chance to make some profits from your SIP investments.