Is Investing in SIP a wrong step?
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Why is SIP Bad?
SIP termed as Systematic Investment Plan is a mutual fund investment and some investors consider it to be bad investment for various reasons.
Although fund managers navigate your funds through the stock markets and help you to obtain at least 20 to 25 percent returns yearly still, SIP funds have certain limitations.
Limitations of SIP Investments:
The investor can make a SIP investment from a minimum to maximum amount as defined by the fund management. But there are limitations laid by the AMC in operating the investments which makes it to be said as SIP to be a bad investment. To note a few,
In a Systematic Investment Plan, you can make an agreement to make an investment weekly, fortnightly, monthly, quarterly, etc.
The usual date of SIP amount that gets debited from your bank can be 1, 5, 10 etc. You will have to select any one date from the dates listed by the fund management.
You can bring out a change in the course of action of the debited amount only when you inform the fund management at least 15 days prior to the date of SIP payment.
Moreover, the fund manager shall debit the mutual fund units whenever you plan to make a partial withdrawal of your funds on a nominal fee.
It is called the exit load fee and is usually dependent on the nature of the fund, and the portfolio the fund manager has put it operational.
You can come across instances wherein the stock markets might be performing better but the return on your fund invested can remain moderate with less returns.
To avoid the SIP bad effects you must follow the thumb rule as mentioned below. It defines the parameters to center-stage the profitability that keeps you away from incurring losses.
Mutual Fund Selection for Making Profits:
Portfolio Diversion:
You must diversify your portfolio and under ideal conditions you must choose about 5 to 6 funds.
Consistency in Investment Style:
You must invest in funds when you find consistency in the style of investments by the fund management team.
Your investment must reflect the investment strategy of the fund managers who maintain the AMC.
Reducing the value of a Low Expense Ratio:
You must select a fund in instances where an asset management company makes balanced investments on portfolios as it may impact the investor in the long run.
Pros and Cons of SIP Investment
Investing in Systematic Investment Plans (SIPs) is always a good strategy when you want to build wealth over the long term.
By investing small amounts regularly (probably monthly), we can benefit from rupee cost averaging, diversification, flexibility, and the power of compounding.
Before knowing whether SIP is bad or good, let us understand what actually the SIP Invest is?
What is SIP Investment?
SIP is a disciplined investment strategy and also the most popular scheme that allows individuals to invest a fixed amount of money regularly in mutual funds.
SIP Full Form
SIP stands for “Systematic Investment Plan“.
With SIPs, investors contribute small amounts at predefined intervals, typically monthly or quarterly. This approach helps build a habit of regular saving and investing while benefiting from rupee cost averaging and the power of compounding over the long term.
Step-Up SIP Investment
A step-up SIP investment is a type of Systematic Investment Plan where investors gradually increase their contribution amount gradually.
Unlike traditional SIPs where the investment amount remains constant, in a step-up SIP, investors have the flexibility to raise their investment amount periodically, usually annually or semi-annually.
Benefits of SIP Investment
Investing in Systematic Investment Plans (SIPs) offers several benefits that can help individuals achieve their financial goals. Unlike direct investment in stocks SIP gives a standard returns over a period of time.
Here are the 9 Benefits of Investing in SIPs.
1. Systematic Investing:
SIPs allow investors to contribute small amounts at regular intervals, such as monthly or quarterly.
This systematic approach encourages consistent saving and investing habits, regardless of market fluctuations.
2. Affordability:
With the option to start with minimal investment amounts, even individuals with limited monthly income can participate in the stock market and benefit from long-term wealth accumulation.
3. Rupee Cost Averaging:
SIPs utilise a strategy called rupee cost averaging, which helps mitigate the impact of market volatility. By investing a fixed amount at regular intervals, investors buy more units when prices are low and fewer units when prices are high, ultimately averaging out the purchase price over time.
4. Diversification:
SIPs offer the opportunity to invest in a diversified portfolio of securities through mutual funds. This diversification spreads risk across multiple sectors, and companies, reducing the impact of individual stock volatility on the overall investment portfolio.
5. Professional Management:
Mutual funds managed by experienced fund managers take the investment decisions in SIPs.
These professionals conduct in-depth research, analysis, and portfolio management to optimize returns and manage risks on behalf of investors.
6. Flexibility:
SIPs provide flexibility in terms of investment duration and frequency. Investors can choose the tenure and interval of contributions based on their financial goals.
7. Accessibility:
SIPs are easily accessible through various investment platforms, including online portals, mobile apps, and financial advisors. Investors can monitor their investments, track performance, and make adjustments conveniently from anywhere at any time.
You can also invest in SIPs through your broker’s website like Zerodha, Groww, Upstox, etc.,
If you haven’t opened your Demat account, here are the registration pages of popular discount brokers.
Zerodha User Registration
Upstox User Registration
8. Power of Compounding:
By consistently contributing to SIP plans, investors can benefit the power of compounding.
Over time, reinvested dividends and capital appreciation can exponentially grow the investment portfolio, leading to significant wealth accumulation in the long run.
9. Transparency:
SIPs offer transparency in terms of costs, performance, and portfolio holdings.
Investors receive periodic statements and reports detailing their investments’ progress, ensuring clarity and accountability from fund managers.
SIPs provide a convenient, disciplined, and effective approach to wealth creation, making them a popular choice for investors looking to build a secure financial future.
Myths and Facts:
SIP has become a popular investment option for individuals looking to grow their wealth over the long term.
Like any investment strategy, SIPs are often subject to misconceptions and myths.
We have identified some popular myths about SIPs and have come up with the actual facts.
This will give a clarity to the upcoming investors.
Myth-1: SIPs are only for small investors.
Fact: SIPs are suitable for investors of all income slabs. Whether you are starting with a small amount like 1000 rupees a month or have a substantial investment portfolio, SIPs offer a disciplined approach to investing that can benefit investors at any level.
Myth-2: SIP returns are guaranteed.
Fact: SIPs can give attractive returns over the long term, but they are subject to market risks. The returns from SIP investments depends on the performance of the underlying assets, such as stocks. SIPs won’t give guaranteed returns.
Myth-3: SIPs are not suitable when the market is in downtrend.
Fact: Market downtrends can give buying opportunities for SIP investors. By investing a fixed amount regularly, SIP investors benefit from rupee-cost averaging, buying more units when prices are low and fewer units when prices are high, potentially leading to higher returns over time. This was already discussed in our article.
Myth-4: SIPs require a large initial investment.
Fact: SIPs allow investors to start with small investment also. Many mutual fund companies offer SIPs with minimum investment amounts as low as Rs. 500 or even less, making them accessible to a wide range of investors.
In India, even a daily wager can invest in SIPs. It was very convenient to invest.
Myth-5: SIPs are only for equity investments.
Fact: SIPs are commonly associated with equity mutual funds, investors can also use SIPs to invest in other assets like debt funds and hybrid funds based on their risk tolerance and investment objectives.
Example
I will try to explain the Systematic investment plan with an example, so that even a beginner can understand easily.
Let us consider two investors, Shiva and Ramu, who each invest Rs. 5,000 per month in a mutual fund through SIP over a period of 10 years.
Let us assume the mutual fund generates an average annual return of 12%.
Shiva starts investing immediately, while Ramu waits for two years before starting their SIP.
Despite investing the same amount, Shiva’s investment grows to a significantly higher value compared to Ramu’s investment due to the power of compounding and the longer investment horizon.
This example illustrates the importance of starting early and staying invested in SIPs to maximize returns over time.
FAQs:
Q1: Is SIP a Safe Investment Option?
Ans: As we have discussed earlier, SIPs are subject to market risks, but by investing regularly over the long term, investors can potentially overcome risks and benefit from market fluctuations. We can say it is safer when you aim for long term approach, since the fluctuations won’t affect long-term investors.
Q2: Can I Change the Amount of my SIP Investment?
Ans: Yes, investors can typically increase, decrease, or stop their SIP investments at any time based on their income sources.
Q3: What Happens if I miss an SIP Payment?
Ans: Missing an SIP payment does not necessarily affect the investment itself, but it may disrupt the investment plan and impact the overall returns at the end of your tenure.
Q4: Do we Need to Pay Taxes for SIP Returns?
Ans: Yes, the returns earned from SIP Investments are taxable. SIP returns from equity mutual funds held for more than one year are subject to long-term capital gains tax, while returns from debt mutual funds are subject to tax based on the holding period and applicable tax rates.
Q5: Can I withdraw my SIP investment before the completion of the investment tenure?
Ans: SIPs are intended for long-term investing, investors can typically redeem their investments partially or fully at any time, subject to applicable terms and conditions.