I personally am a great fan of Systematic Investment Plan (SIP) in Mutual Funds. Also known as Rupee cost Averaging (in India) or Dollar cost Averaging (in US) it’s no doubt a well known strategy to create serious wealth in long term. But I have not found many sites talking about the flip side of SIP.
So here is a post to make you aware of the disadvantages of using SIP and suggest if there is a way out?
Systematic Investment Plan (SIP) Disadvantages
SIP returns are lower in consistently rising markets:
Imagine this situation – Its New Year eve of 2009 and your rich uncle impressed by you & your cousin gifts both of you Rs 1 Lac. You both being financially prudent want to grow this windfall. You approach a financial planner and as every good planner would, he recommend you to invest in NIFTY BeeS using SIP. So you follow him and plan investment in 12 monthly SIP installments while your cousin puts his entire money as lump sum investment in the same NIFTY BeeS. Who do you think made more money by 2010 New Year eve? Your cousin would have around Rs 1.72 Lac while you would have Rs. 1.37 Lac. So your cousin gained 25% more just by doing lump sum.
Lesson Learned: SIP is a good way to invest but occasional lump sum investment when the markets are highly undervalued adds to your gains.
Limited options of dates:
For a SIP in Mutual Fund you need to decide a date in advance when you like to do your SIP and give an ECS mandate for the same. Most of the MFs have limited option (mainly 1st, 5th, 7th, 10th, 15th, etc). So you tend to invest in multiple mutual funds on the same date. You want to lessen your risk by spreading your SIP in the entire month by choosing different dates for different funds.
Way out: For funds having an online option you can do SIP yourself but without emotions coming into play or second option is do SIP with fundsindia.com that provide SIP on all dates.
There are times when you feel that markets are undervalued and you want to invest more but then in SIP only a predetermined fixed sum gets invested. Same is the case when you want to invest less, you can’t do it.
Way out: Try VIP (Value Averaging Investment Plan).
Stopping intermediate payment:
It may so happen that you got an emergency or have a major expense this month and so you don’t want to invest. But with SIP this is not possible; if there’s money in your bank it will get debited and invested. The only way out is to cancel the SIP which can be a nightmare if you have a lot of SIPs and also when you want to start again you need to go through all the formalities to start the SIP. Also for cancellation you need to inform 2 weeks in advance and even then you may not be sure that SIP would not be debited.
Lot of delay between actual application & start/stop of SIP:
I feel this is very irritating and you may miss one monthly installment; MF houses need at least a month to start a SIP and around two weeks to stop your SIP. I think it’s the time they should try to come up with quicker processing of SIPs.
Does not suit people with unpredictable cash flows:
Think of someone who doesn’t have a predictable cash flow like a self-employed professional. He won’t be able to do SIP as he would be unable to commit a fixed sum every month.
Even though SIP suffers from these disadvantages but it still seems to be one of the Best investment option available to a long term investor. It particularly suits First-time investors in equity and those who do not have a lump sum or the time to track their investments. The salaried class should also opt for SIPs since it becomes a good savings habit. Investors who do not wish to be stressed by market volatility should adopt the rupee-cost averaging method for secured long-term investment planning.