Systematic Investment Plan (SIP) Advantages and Disadvantages

Investing in the right assets is very important to create wealth. Stock markets usually have a higher gain when compared with risk-free assets like fixed deposits. However, you need to know the stock market well before you start investing there. Mutual Funds are the best financial instrument for people who want to invest money in stock markets but lack the knowledge or time. Expert fund managers manage mutual funds, and they help you get better returns when compared with fixed deposits.

There are two ways to invest in a mutual fund. The first method is to invest a lump sum amount, and the second is to use a systematic investment plan. For the rest of the article, we will refer to a systematic investment plan as SIP.

🤔 What is a Systematic Investment Plan (SIP)?

Systematic-Investment-Plan

SIP full form is Systematic Investment Plan, It is also known as Rupee Cost Averaging in India and is an automatic investment plan. You can invest a certain amount daily, bi-monthly, monthly or quarterly (after a fixed interval). Once you start the SIP, the amount is deducted from the account, and the Mutual Funds are purchased with that account. This takes the emotions out of the investments and reduces the risk for investors. The SIP has certain advantages and disadvantages, and we have listed them in the section below.

👍 Advantages of Systematic Investment Plan (SIP)

To help you understand more about SIP, we have listed all the benefits below.

1. The discipline of Investing – SIP brings discipline to investment. When you initiate a SIP, the money will be deducted from the account and invested in mutual funds. The deduction works like an EMI transaction, bringing discipline to your investing schedule. Without a SIP, you may give investment a skip for some months in a year, but with a SIP, the investment will be automated every month.

2. Simple to Invest – When you initiate a SIP, you have mutual funds pre-selected. This way, you don’t have to choose the mutual funds every month. Investing is automated, so it makes it simple for you to invest. The money is deducted from your account, and it is invested in the SIP without your intervention.

3. Flexibility – SIP also gives you flexibility. You can change the tenure, select the date, change the amount and do many other things depending on the portal you are using. The flexibility is of great help when you are investing, and you should be able to leverage that for various purposes. You can also save according to your goals and create multiple portfolios using the SIP.

4. Power of Compounding – SIP is more like recurring deposits but with better returns in the usual cases. You get to witness the power of compounding because you earn money on the total amount invested. The mutual funds’ Net Asset Value (NAV) is revised daily, so you can track your profits regularly. With the power of compounding, you can save considerable money for future use.

5. Higher Returns – As mentioned earlier, the SIP gives you a higher return. The reason is that it reduces the market risk. During the typical investment cycle, you can expect the market to be on a higher or a lower side every month. Because of the SIP, this risk is reduced as the NAV is averaged. In addition, you don’t have to depend on forecasting. The risk during the lump sum investment is higher when compared with SIP.

6. Different Variations of SIPs – There are many different variations of SIP available that can be used. Depending on your need, you can use Flexible SIP, Step-Up SIP or even Trigger SIP. These allow you to make a conditional investment with a pre-defined logic. So, you can check out the portal or SIP Apps that you are using for investing in these different types of SIPs.

👎 Disadvantages of Systematic Investment Plan (SIP)

Like two sides of a coin, SIP has advantages and disadvantages. We have discussed the benefits, so let us now look at the other side.

1. Cancellation of SIP – Some platforms don’t allow you to cancel the SIP yourself. You would have to open a support ticket or call customer service to cancel the SIP. This may sound inconvenient to some people.

2. Not for People with Unpredictable Cash flow – If you don’t have a stable source of income, then we don’t recommend investing using the SIP. The reason is that the SIP is like an EMI. We are sure you don’t want to default on the date because of a lack of funds. Moreover, it can be challenging to set aside the amount during a particular month if the cash flows are slow.

3. Miss Buying Opportunity – If the market is bullish, you may miss the buying opportunity. This may not sound favourable as you can lose your profits. In such a case, you can make a lump sum investment if you believe the market will be bullish.

Conclusion

This was all about the Systematic Investment Plan. You can create your retirement corpus or save for a car, a child’s marriage, or anything else using the SIP. During withdrawal, you can choose not to withdraw the funds immediately. Instead, you can set up something like STP, which will help you withdraw the money at a fixed interval. Always remember that making bigger transactions is always riskier; hence, SIP or STP can help you break them down into smaller sizes.

SIP Frequently Asked Questions

Q1. Should I Invest Using Systematic Investment Plan (SIP)?

Ans: If you invest in mutual funds, then we recommend investing through the SIP. This is an easy and safe way to invest money in mutual funds. If you are sensitive to market falls, you can also set up a trigger SIP. Moreover, using the SIP, you can allocate your money to different funds and meet your goals. The step-up SIP offers an added advantage as you can increase the SIP amount with every salary hike. So, we are highly in favour of investing using the SIP. Almost every mutual fund platform offers SIP at no extra cost. You can skip the SIP if you need more money in a particular month.

Q2. Is it possible to withdraw money from SIP anytime?

Ans: Yep, you can withdraw your money from a SIP anytime you like! But before you take the leap, just know that if you withdraw your investment before the investment period is over, there might be some exit loads or penalties involved. So, just make sure you’re aware of those fees before you take your cash out of the game.

Q3. Which one is a better investment option, SIP or FD?

Ans: Choosing between SIP and FD is kind of like choosing between a cozy night in and a wild night out. FDs are like the cozy night-in, reliable and safe, but maybe a bit boring. SIPs are like a wild night out, exciting and full of potential, but a bit more unpredictable. If you like to play it safe, go for an FD. If you like to take a risk and see where the night takes you, a SIP might be more your style.

Q4. Can I make changes to my SIP investment plan after I have started it?

Ans: Well, with most investment platforms and online brokers, you can’t just change the SIP amount whenever you like. It would be a better choice to just start a new SIP investment from scratch, and start your investment plan from there without hindering your previous SIP investments.

Q5. What happens if I miss a SIP installment or stop investing altogether?

Ans: If you miss a payment or stop investing altogether, your investment won’t be discontinued. However, missing more than three investments may impact the potential growth of your investment. Plus, some mutual fund companies may charge you a penalty fee for missing your installment, so it’s best to stay on top of your payments if you can.

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