What is Risk? What are factors affecting risk profile? How can you decide or find out your own? Is risk good? Is your risk profile also affecting your investment habits or its your investment habits affecting your risk profile?
The reason why I am starting so many questions is one tweet.
Sunday is about playing the Devil’s advocate!
Does only investing in SIPs bring down the actual risk taking ability of a person?
— swarup mohanty (@mohanty_swarup) September 24, 2017
Very Important question in the time when we are listening SIP and their advantages everywhere.
So lets start with the DEFINITION of BOTH.
As per INVESTOPEDIA
Asset management is the direction of a clients cash and securities by financial services companies usually Investment Bank.
Now check risk management.
The forecasting and evaluating financial risk together with the identification of procedures to avoid or minimize their impact.
So now the question is
IS SIP RISK MANAGEMENT or ASSET MANAGEMENT.
The main question is Risk apetite. Risk apetite is the ability to take risk while you are investing.
here I am explaining it in simple way.
You are salaried person. Limited income. you dont believe on equity and growth story. So naturally you love to invest in Fixed income securities or even better physical assets like gold and real estate. With Respect to your income, expenditure is sufficient high like 60-70%. You dont have liabilities like big home loan as you are living in Your family home. As you are coverd under Defined Benefit plan, that front is also covered.
In such situation if you want to invest in equity. you went to some AMC office. They will show you all their marketing material and start telling you plus points of SIP. so what is your risk appetite and Risk taking ability and is that really making big difference?
Here for understanding SIP we need to understand what is SIP.
Lets assume you want to invest Rs. 10000. As you went to mutual fund office, all their marketing people start telling you how great SIP is? you influenced by it and decided to invest in 10 different payments STARTING from 2 Jan. ( 1 January was holiday. Numbers used hereafter are taken from Actual NSE Nifty or CNX Nifty for January to October 2017.) But as you are irritated that why this people want me to invest over time and not in one time. So you invested heavily, (Assume 10000) on 2 jan.
1 Jan was holiday. so you invested 10000 as lump-sum on 2 Jan. You earned 26.70% on that. so on that option you are holding Rs 12670.
But as Mutual Funds people forced you to invest in 10 Monthly installments. First we have 26.70% so on 1000, you have 1267.
on 1 Feb you invest 1000. for that you 18.90%. SO ON THAT AMOUNT YOUR TOTAL IS 1189
ON MARCH INSTALLMENT YOU EARNED. 15.85% SO 1000 BECOME 1158.5
On April you invest 1000. You earned 12.19%. So 1000 become 1121.9
May. invested 1000. earned 11.27. 1000 become 1112.7
June. Invested 1000. earned 7.77%. 1000 become 1077.7
July. Invested 1000. Earned 7.81%. 1000 become 1078.1
August. Invested 1000. Earned 2.46%. 1000 become 1024.6
September. Invested 1000. Earned 3.90%. 1000 become 1039
October. Invested 1000. Earned 4.53%. 1000 become 1045.3
now if you add all this what you found?
1267 + 1189 + 1158.9 + 1121.9 + 1112.7 +1077.7 + 1078.1 + 1024.6 +1039 + 1045.3 = 1114.2
Lump-sum is 12670. via SIP 1114.2. No doubt its small. But the benefit is you can keep your SIP for long term. the difference here is all due to price i am taking. I am taking closing price of nifty. so the trade of whole first day of month was gone and that is making difference.
so now lets go to the actual question.
Does only investing in SIP BRING DOWN ACTUAL RISK TAKING ABILITY of a person?
and I believe the people who voted in the poll were thinking about one factor which is invisible. That is in any case, weather SIP or Lump Sum, YOUR WHOLE INVESTED AMOUNT IS AT RISK. SIP ONLY HELP YOU TO AVERAGE COST of your investment. Once you invested you are at risk.
Risk taking ability is determined by many things. Age, income, leverage on your life in many ways like Future expense of children, availability of insurance, Even liquid reserve funds available monthly expense also affect it. . SIP is way to make cost average.
So how to increase Risk Taking ability
- Start investing Early.
- Buy TERM INSURANCE. (Insurance is not investment.)
- Buy Health insurance covering major illness.
- YES. SIP can help you to investing.
- Invest through MUTUAL FUNDS. Fund manager is there only for managing your money. It helps as you cant track 50 different companies with reading their Annual Report and meeting with management.
- ETF is good way.
- Concentrate on COST like phone call to broker, cost of extra report if any.
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