Who would have thought that a portfolio made up of low-risk SIP plans can become a problem?
We as amateur investors always assume that when we invest in safe Systematic Investment Plans, we do not have to pay heed to the declining market value. But what we seem to miss is that the low-risk SIP investment comes with its own set of challenges and issues which tend to put the goals at risk.
In this article, we will be looking into the most common issues that can creep up in your portfolio if you select the SIP Plans with fund safety as your priority and then the ways you can overcome your weakness and take some calculated risk.
Let us begin.
The Risk of Loss = Risk of Growth
Suppose your financial goals are long-term but your investments are short-term in nature, you are most likely going to face the risk of your savings eroding because of inflation. You might find your corpus not being adequate to meet goals until you are investing more in SIPs.
There’s a second scenario which proves how being too safe can be wrong for you. Suppose instead of taking the SIP route where you can take the money back into your account by ending the investment any time, you invested in PPF. In case an emergency expense arises, you will not be able to withdraw funds from your PPF account – rendering your funds useless.
The third situation that comes as a result of being risk-averse is choosing an income-based investment because you were too afraid to make it a growth-based investment. Until you develop the zeal to take risks and remain invested for the long term, your corpus won’t grow to its true potential as you are not reinvesting the interest or staying put in the investment for long enough to help your portfolio actually grow.
In all the scenarios shared above, risk aversion is the one factor that has emerged as the speed breaker standing between you and the true potential of your SIP investment.
Now that you must have gotten the idea of how being too risk-averse can be bad for your financial planning and for the goal you are set out to achieve, the next step is to question the fear’s source and find a solution which would help make you more risk-tolerant – by allowing you to have risky SIP plans in your portfolio to help eliminate the problem areas of your portfolio.
Management of Risks
More often than not, it is the risk of loss in investment value which holds investors back from earning returns. While it is true that there is no way to eliminate volatility, you can indeed eliminate the downfalling impact that it would create by adding riskier investment such as SIP plans in your long-term investment goals’ portfolio.
While these systematic equity plans might face volatility in the short term, when you look at the 3 – 5 years scenario, you will find them to be profitable.
The second contributor to making investors risk averse is the stress of checking the value of funds on a regular (sometimes even hourly) basis. But, by investing in investment modes like Systematic Investment Plan, the need gets eliminated and so does the risk.
The third and most crippling risks out of all isthe risk of running out of money in times of emergency. The fear of not taking the funds out when needed might prevent you from making investments in risk-oriented mutual funds or simply might not allow you to reinvest the returns you get on SIP..
The only solution to this is creating a safety net. Before you even start investing in Mutual Funds, you should create an emergency fund. Ideally, it should be 12 months of your expenses if you are a single income family.
Now that you know the negative aspects of being too risk-averse and the steps you should take to be more risk oriented, what are you waiting for? Start investing in mutual funds that will get you profit in the long run!