Sep 08, 2017 3 min read

Is it true that SIP Eliminates the Risk of Losing Money? Know here

Does SIP helps to eliminate the risk of capital loss? Know more.
The popularity of SIPs is growing day by day, and investors are achieving their financial goals efficiently. The traffic of investors is increasing rapidly, and the mutual fund industry is setting records of Assets Under Management (AUM) every time. The primary reason behind its increasing popularity among the investors is the efficiency it provides in investing in the stocks.

Investors can avail a hassle-free journey of stock investments to reach the financial goals in time. But, many investors have built up a misconception about SIP which must be kicked out in order to experience the actual benefits of SIP investment.

Here are the major misconceptions of the investors about SIP:

1. SIP Protects you from Losing Money : Many understand that SIP safeguards from losses and helps to earn risk-free returns. If you too have this fallacy, then wake up and clear your concept about SIP. Yes, it is true that it helps you to minimize the risk of capital losses in equity investments but does not eliminate it entirely. Getting confused? Let’s know the scenario in detail because your hard-earned money should be invested in the right place to get the best exposure of it.

You may lose the capital even on an SIP if the market acutely falls after you begun your investments during the bullish market. But, in the longer run, the same investment can overlap the loss incurred and chase the positive returns. The experts have analysed that SIP which has been continued for four years or longer, depicted the rare possibilities of losses and provided good returns. SIP doesn't eliminate the risk of capital losses, if you have such belief then be cautious because you might have delusions. SIP can reduce the risk intensity to the minimum and increase the surety of returns if the investments are held for a longer tenure. Furthermore, the risk of capital loss is different in the different category of investments. SIP in large-cap equities carries an average level of risk as they are less volatile. The small- and mid-cap stocks are highly volatile which make them riskier.

2. Starting an SIP in Beaten-Down Sector will be Beneficial : Some of the investors also have this fallacy that investment in the sector which is currently not performing well may be profitable. They think that SIP in a beaten-down thematic fund like pharma will provide them excellent returns in the future. In reality, SIP provides the way to invest in an orderly manner to avoid the burden of a significant amount, unlike in a lumpsum. There are many other benefits of investing through SIP, but none of them indicates that a thematic fund investment will boost up the profits. The market trend is entirely an uncertain factor, the financial experts only assume the future trends but don’t assure. However, SIP helps to optimise the risk and returns in the duration of more than four to five years. Sector funds can showcase high fluctuations in the short run, but during longer tenure, the risk gets adjusted with the compounded growth of the capital.

Moreover, if you still believe that you can keep good track of the market trend and want to capture the outperformance of the sector fund. Then, you can invest through lumpsum which will allow you to earn excellent profits, but you need to be cautious about the risk involved.

3. Star-Ratings Cannot Go Wrong : There are rating agencies like CRISIL which give a star-rating to the mutual fund schemes by their risk adjusted past performance. Yes, it is very true that the rating provides an idea about the fund that how it is capable of providing excellent returns. But, it does not assure the future performance of the fund. Many investors have the misconception that a five-star rated fund can never go down in the market. They invest in high rated schemes and desire for high profits. Let us clear you again that, a star rating does not assure the future performance of the fund. The rating may fluctuate, a five-star can slip down to three-star based on the risk adjusted performance of the fund. So, it is not certain that a high rated fund assures your returns, it may even showcase a down performance in unfavorable market trends.

Do not keep any misconception about the SIP investment because you invest your hard-earned money to attain financial goals. And we believe that all your financial objectives must be achieved efficiently. To know more about investments in a mutual fund you can read our daily blogs at MySIPonline.