The SIP, Systematic Investment Plan is basically a scheme that allows you to invest a small amount of money in mutual funds on a pre-set date every month. The SIP is considered as one of the most efficient methods of entering an equity market, the main reason for such a comment is because it creates a discipline in investment for the investor.
A SIP is known for its flexibility and the burden on the investor is less. He/she has to pay only the smallest amount each month for a pre-set period which eventually leads to accumulating the required amount at the end. Another important thing about this scheme is that the investment done can be taken out at any time and the tenor is not fixed. With this being told you should also know that even if the tenor of SIP is fixed the investor can stop investing and also can continue investing even after the tenor. These are the common reasons that attract an investor to SIP schemes. However, SIP has both advantages and disadvantages and it is totally the investor’s personal choice to stick on to SIP or not.
Advantages Systematic Investment Plan (SIP)
Like I mentioned above, SIP has several advantages and there have been an increase in the number of SIP investors in the past few years. Now, here are some of the most common advantages that people consider while choosing a SIP.
- Stress-Free–The investors who choose to enter or deal with mutual funds through SIP route do not have to worry about payment or timing the market. A SIP is set in such a way that the fixed amount and time are set in the beginning and the process happens automatically. However, the investor should review the whole process on a periodic basis to stay updated.
- Discipline – This is the most important advantage of SIP’s. The investor who plans to redeem a decent gain from the mutual fund will automatically save his earnings for SIP monthly payments. This makes it easier for him/her to manage the fund in long run.
- Compounding – The major advantage of SIP is its compounding power. The investor has to pay only a small amount each month for a fixed period of time. Eventually, the invested amount keeps on growing each month and the investor does not feel the pain of paying. It is just like a piggy bank, in the end, you will have a huge amount invested in the mutual fund.
- Convenience –Normal mutual funds require huge funds from the investors, but in SIP the investor has to pay only a feasible amount each month for a fixed time period according to the investor’s convenience.
- Easy to Invest –SIP amounts can be as less as INR 500 per month. Investing in a SIP is one of the hassle free processes that automatically deduct the amount from the assigned bank account. The monthly payments are so less that the investor will not have a guilt feeling.
Disadvantages Systematic Investment Plan (SIP)
Apart from the advantages, the SIP has disadvantages that the people have so far not considered or realized.
- Does not suit people with unpredictable cash flows – SIP route can opt only if the investor is sure that he/she can pay the fixed amount every month without fail. If the investor is a person with unpredictable cash flow, paying the SIP can be messy. He/she might not be able to pay the SIP monthly.
- Stopping the payment in between is a nightmare – SIP amounts are automatically deducted from the bank account assigned. If in case the investor has an emergency and wants to skip the payment a month SIP does not allow such provisions. If the bank account has the amount, the amount will be deducted and the only way to stop it is to cancel the SIP. But, remember once you cancel the SIP you will have to go through a lot of formalities to restart the SIP and apart from this to cancel the SIP you will have to inform the institution 2 weeks in advance.
- Fixed amount – Once the SIP is started a fixed amount has to be paid each month. This amount, however, is chosen by the investor in the beginning. But, the key disadvantage is that the amount fixed in the beginning should be paid every month without fail and the amount cannot be changed or modified under any circumstances.
- Dates and time period are fixed and cannot be changed–Once the date and period is fixed on a SIP payment. The date and period cannot be changed. The bank account should have the amount on the date assigned in the beginning without fail.
- Ups or downs investment is uniform–No matter of ups and downs in the market the investor has to pay the fixed monthly amounts. He/she cannot change the amount or periods.
The above-mentioned advantages and disadvantages were collected from reputed websites authored by experts. However, SIP is the best choice for investors that have constant and predictable income.
One thought on “Advantages and Disadvantages of Systematic Investment Plan (SIP)”
Aw, this was a very nice post. Taking the time and actual effort to produce
a good article… but what can I say… I hesitate a lot and don’t seem
to get nearly anything done.