Systematic Investment Plans (SIPs) are a popular way to invest in mutual funds. They offer a number of advantages, such as rupee cost averaging, disciplined investing, and the ability to invest small amounts of money regularly. However, there are also some disadvantages to SIPs that investors should be aware of.
1. SIP returns are lower in consistently rising markets.
When the market is rising consistently, the average cost of units purchased through SIP will be higher than the average cost of units purchased through a lump sum investment. This is because the SIP will be buying more units when the market is high and fewer units when the market is low. As a result, the overall returns from a SIP will be lower than the returns from a lump sum investment in a rising market.
For example, let’s say you invest Rs. 1,000 in a SIP every month for 12 months when the market is rising consistently. The average price of the units you purchase will be Rs. 100. If you had instead invested Rs. 12,000 in a lump sum at the beginning of the year, your average price would be Rs. 90. This means that your returns from the SIP would be 10%, while your returns from the lump sum investment would be 11.11%.
Solution : Invest for the long term. The longer you invest, the more likely you are to benefit from rupee cost averaging. This is because the market will go up and down over time, and your average cost of units will be closer to the average market price if you invest for the long term.
2. Limited options of SIP dates.
Most mutual funds offer SIPs on a monthly basis. However, some funds also offer SIPs on a quarterly, bi-annual, or annual basis. If you need to invest on a different schedule, you may not be able to find a SIP that meets your needs.
For example, let’s say you want to invest Rs. 1,000 every two weeks. You would not be able to find a SIP that offers this option, so you would have to invest Rs. 500 every week. This would make it more difficult to track your investment and to ensure that you are investing the correct amount each time.
Solution : (a) To overcome the limited options of SIP dates and gain more control over your investment schedule, you can invest in a liquid fund and set up a Systematic Transfer Plan (STP) to transfer money from your liquid fund to your equity fund on any date that you want. You can choose the frequency of the transfers and the amount of money that you want to transfer each time. This gives you more control over your investment schedule and makes it easier to track your investments. However, it is important to understand the risks involved before you invest, such as the value of your investment may go down and you may incur fees.
(b) Invest in a fund that offers flexible SIP dates. Some funds allow you to invest on a weekly, bi-weekly, or even daily basis. This gives you more control over your investment schedule and makes it easier to track your investments.
3. Only pre-defined fixed amount can be invested by SIP.
SIPs allow you to invest a fixed amount of money on a regular basis. However, if you need to invest more or less than the pre-defined amount, you will not be able to do so. This can be a disadvantage if your income fluctuates or if you have unexpected expenses.
For example, let’s say you are investing Rs. 1,000 in a SIP every month, but you have an unexpected expense and you need to reduce your investment to Rs. 500 for a month. You will not be able to do this, so you will have to miss a payment. This could impact your long-term returns.
Solution : Choose a SIP that offers flexible payment options. This will give you more control over your investments. Some SIPs allow you to invest on a weekly or bi-weekly basis, which can be helpful if your income fluctuates.
4. Stopping intermediate payment in SIP.
If you need to stop your SIP payments for a period of time, you will have to do so manually. This can be a hassle, and it can also be easy to forget to restart your payments.
For example, let’s say you are investing Rs. 1,000 in a SIP every month, but you need to stop your payments for six months due to a job loss. You will have to remember to restart your payments after six months, or you will miss out on six months of investment.
Solution : Be prepared to stop your SIP payments if you need to. However, try to restart your payments as soon as possible. If you have to stop your SIP payments for a period of time, it is important to restart them as soon as possible. This will help you to minimize the impact on your long-term returns.
5. Delay between actual application & start/stop of SIP.
There is usually a delay between the time you apply for a SIP and the time it actually starts. This is because the fund house needs to process your application and allocate units to your account. Similarly, there is also a delay when you stop a SIP. The fund house will continue to invest your money for a few more days after you have stopped the SIP.
For example, let’s say you apply for a SIP on January 1st. Your SIP will not start until January 15th, and your first payment will be made on January 30th. Similarly, if you stop your SIP on January 31st, your fund house will continue to invest your money until February 15th.
Solution : Be aware of the delay between application and start/stop of SIP. This is a minor inconvenience, but it is important to be aware of it so that you can plan accordingly.
6. SIP does not suit people with unpredictable cash flows.
SIPs are best suited for people who have a steady income and who can afford to invest a fixed amount of money on a regular basis. If your cash flow is unpredictable, it may be difficult to keep up with your SIP payments.
For example, let’s say you are investing Rs. 1,000 in a SIP every month, but your income fluctuates. Some months you may be able to invest the full amount, but other months you may only be able to invest half the amount. This could impact your long-term.
Solution : Consider other investment options. If you have unpredictable cash flows, you may want to consider other investment options, such as lump sum investments or systematic withdrawal plans (SWPs). SWPs allow you to withdraw a fixed amount of money from your investment account on a regular basis. This can be a good option if you need to access your money regularly, but you still want to benefit from the power of compounding.
Conclusion
SIPs are a popular way to invest in mutual funds, but they have some disadvantages. These include lower returns in a rising market, limited options for SIP dates and the amount that can be invested, a delay between application and start/stop of SIP, and not being suitable for people with unpredictable cash flows. However, there are ways to overcome these disadvantages, such as investing for the long term, choosing a SIP that offers flexible SIP dates, and being aware of the delay between application and start/stop of SIP. By following these tips, you can minimize the disadvantages of SIPs and maximize your chances of achieving your financial goals.
Disclaimer:
This article is for informational purposes only and should not be considered financial advice. The author is not a financial advisor and does not have any formal training in finance. The information in this article is based on the author’s personal experience and research. The author does not guarantee the accuracy or completeness of the information in this article.
Investors should always do their own research before making any investment decisions. This includes reading the prospectus of any mutual fund or ETF that they are considering investing in. Investors should also consult with a financial advisor to get personalized advice about their specific financial situation.
The author is not responsible for any losses that investors may incur as a result of following the advice in this article.
