Thinking of investing in SIPs? Well, this article is for you. We all have heard about how good SIP programs are when it comes to their ROI. Read till the end to find out why you should think twice before investing in SIPs.
Nothing in the universe can lead to perfection. SIP programs also have advantages and some drawbacks. But before moving to the drawbacks straight away, we need to understand what SIP programs are. Systematic Investment Plans or commonly known as SIPs, as the name suggests are programs that are managed by mutual fund companies that allow the investors to invest in their preferred mutual fund systematically. When you join a SIP program, you need to invest a fixed amount in the mutual fund at fixed intervals. This amount is directly deducted from the investor’s account. The gap between the investments varies from program to program. It can be weekly, monthly, or can be even done on an annual basis. Connect with Vakilsearch for seamless investing in SIPs. Our Chartered Accountants are always ready to help you with all your financial issues.
What are the Drawbacks of SIPs Programs?
Here are a few drawbacks of SIPs:
Returns can Decrease Over Time:
The biggest drawback of SIP is the decrease in returns when markets start to rise continuously. As the market continues to rise, the average value of the units keeps on rising and thus the no. of units bought in each purchase goes on decreasing.
Whatever the state of the market is, you always pay the same amount for investment. This impacts the returns and thus in such cases, lump sum investments turn out to be the better option.
Skipping an Installment is a Hassle:
Although SIPs provide an option for skipping an investment instalment if you are running low on funds. But the process to be followed to make this possible is very inconvenient. To skip any instalment, you need to cancel the complete SIP program and start over. Also, if you want to cancel the investing in SIPs program, you need to inform the mutual fund company 2 weeks in advance and even that doesn’t guarantee that money won’t be debited from your account.
Slow Processes:
As mentioned earlier, you need at least 2 weeks in hand to cancel a SIP program, which is already an irritating fact in the modern online era where things happen in just a few clicks. The more irritating fact is, you need to wait for at least a month before you can start investing in the SIP program, even if you complete all the formalities on time.
It is well said investing in SIP mutual funds requires a lot of patience.
SIPs are for People With Fixed Cashflows:
A person who receives a fixed amount at the end of each month can easily in investing in SIPs plans. But for a person with unpredictable cashflows, SIP programs are a hassle to manage.
Consider An Example:
Imagine a person has an instalment date of 1st April. He / She hasn’t received the required money yet and the date on the calendar is 15th March already. He/She then decides to apply for the cancellation of the program thinking that they won’t be able to pay on time. But on the 27th of March, they receive the required money but as they have already applied for cancellation, they cannot go back. This happens in many cases and thus makes SIPs a hassle for people with unpredictable cash flows.
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Not for Short-Term Investors:
If you are looking forward to SIP program as an option for short-term investments, then you might need to think twice. The ROI of SIPs is best when invested for a long period. You won’t be happy after looking at the results if you invest for a short period in SIP schemes. To obtain a great ROI from SIPs, you need to have a lot of patience and need to invest for at least 15-20 years. For short-term investors, lumpsum investing is the best option.
The Lock-in Period Locks you in :
Many investing in SIPs ship with a lock-in period which means you are now tied to the SIP program for a specific period. You must have to keep your money invested in the scheme for a specific period. However, certain schemes don’t have any lock-in period. Therefore, you must read the documentation properly before investing.
Calculations are Tough:
As we know, the investments made in SIP programs are made at different rates in every instalment. This makes it difficult to calculate the ROI and sometimes it is really difficult for a common man to use complex formulas when they are just there to invest their earnings and convert them into savings.
SIPs might create liquidity risk:
As mentioned earlier, some investing in SIPs programs ship with a lock-in period. Due to such restrictions, redeeming your returns becomes a bit of a hassle. The delay in obtaining your returns and the restriction of the lock-in period create risks to the liquidity of your money. Once your money is locked, you are automatically locked.
Conclusion
Even though SIPs might have drawbacks, they are still undoubtedly one of the best options to invest money on a long-term basis. If you are aiming to get the best ROI from SIP programs, make sure you invest for an extended period. If you want to avoid any problems in the future, it’s always better for you don’t involve any third person and read and understand all the scheme-related documents carefully.
They are a pretty good option for people belonging to the salaried class or people who just want to invest their money and don’t have much time to keep proper track of their investments and don’t want to stay stressed out due to market conditions. But if you are someone who doesn’t have a fixed income or a person with unpredictable cash flows, you should go for lumpsum investments whenever you have funds available.
If have any other queries related to SIPs or the process of investing in SIPs, you may always feel free to connect with financial experts at VakilSearch.
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