August 29, 2017

The Pros And Cons of A Systematic Investment Plan


Very relevant question since SIP has gained a lot of popularity in recent times. In fact, its one of the most popular ways for investments in India in current times.

What is SIP?

SIP, Systematic Investment Plans, is a investing a fixed amount at a fixed time interval in a given Mutual Fund. Monthly is a most famous interval.


SIP Popularity

The industry has witnessed a month on month growth of 7% in SIP inflows in May by receiving Rs.4680 crore compared to RS.4270 crore in April. The total SIP accounts in May stood at 1.40 crore, up by 6 lakh from about 1.34 crore in the previous month.

Pros and Cons of SIP

Pros
  • Cost Averaging - This is the biggest benefit of doing SIP. Through SIP you are investing at every all prices. If the market is down, you are buying more units and when the market goes up (that is the reasons you are investing), the value of the investment goes up. This removes the risk of investing at the wrong time.
  • Can Start with Small Amount - You don’t need to have a lot of savings to start a SIP. Most of the good Mutual Funds let you start SIP with as low as Rs 500. Check 
  • Disciplined investing - A lot of people complain that they are not left with enough money to invest by the end of the month. With SIP, one starts investing right in the beginning of the month and spends from the left money. This brings disciple in saving and creates wealth in long term.
  • Regular Investing- A lot of people in India are not investing because of sheer laziness or mental effort. With automated SIP, you need not worry about the investment every month and it’s taken care of automatically.
Cons
  • Averaged returns - if you strongly believe (and have some data points) that the market will go up in near future, investing lump sum would be better than SIP, since SIP will average your cost.
  • Less control - In a way SIP is a rigid product. You are investing a fixed amount in a fixed Mutual Fund scheme. If you want to change the scheme or the amount, you need to stop the first SIP and start a fresh one.
  • Cumbersome returns’ calculation - Every month you are investing at a different price. The standard returns (current price-purchase price) does not make sense for such investments. You need to use XIRR (excel) for calculating the returns and comparing it against other investment options.
Overall, the pros clearly overweighs the cons of SIP. If one need to invest, SIP is the best way for re-risking the investments and building wealth.



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