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The Negatives of Investing in a SIP

• These products can limit the potential growth an individual could achieve if the markets ‘take off’.

• These investments are fixed-term products so if one cashes them in early one may have to pay quite high charges.

• Because these investments are linked to stock markets, they will generally suffer when these markets are falling.

Terminologies Related to SIP

Term
These products tend to have a life of three to six years. One needs to consider his/her expected financial needs over the period of the product as these plans are not designed to be cashed in early.

Underlying Assets and Indices
Usually part of the overall return - either the income or growth or the return of an individual’s original investment - depends on the performance of a stock market index or indices. However, sometimes they can be based upon specific stocks or other indices such as those based on house prices.

Gearing
Most products have a level to which the share or shares, index or indices can fall before the original investment is at risk. Once this level has been reached, some products reduce the amount of the original investment that one will get back on a one-for-one basis. In other words, for every 1% the index finishes below the initial level there is a 1% reduction in the original investment. However, some other products reduce the amount of the original investment faster. For example, on some plans for every 1% fall, one may lose 2% of the initial investment - these tend to be the ones offering higher returns.

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* Contributed by -
Vipin Arora,
B.Tech. (Polymers), H.B.T.I. Kanpur,
MBA (Batch 2004-06),
Dept. of Management Studies, I.I.T. Roorkee.