Should SIP Be The Only Way To Invest In Mutual Funds?

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A lot of advertisements have surfaced on Systematic Investments Plans (SIPS) that investors who are novices in the field of investing have begun asking: Is SIP the only way to invest in mutual funds? The answer is no.

Should SIP Be The Only Way To Invest In Mutual Funds?
Many say its is the ideal way to invest so as to average out. There are other ways to invest in a mutual fund and that would be to invest in lumpsum just once or large amounts regularly.

So why only SIP?

SIP is a manner of investment, where you do not invest a lumpsum, but, small amounts every month, fortnight or according to your convenience.

Read What is a SIP

The logic and idea behind this is, since you cannot time the markets, by staggering the investments at regular period you are taking lesser risk. That may not necessarily be the case though.

Let us explain this with an example of a share and not of a mutual fund scheme. Let's say you buy shares of ABC. Now, in Jan if you bought it at Rs 100 and the markets fall, an SIP would help you to buy again at a lower cost of say Rs 90, thus helping you to get an average price of Rs 95. For example, if you bought only once your average cost would be Rs 100.

But sometimes SIP is not necessarily beneficial, unless you have a very long term perspective. Let's give you an example. Say you invested in an SIP in the last one year. The Sensex has rocketed in the last one year and has in fact fallen from peaks of 30,000 to current levels of Rs 26,000.

If you had invested a lump sum today at 26,000 points instead of SIP in the last 12 months when the Sensex was constantly on the rise, you would possibly end-up preserving losses. It's not necessarily that you always gain through SIPs.

Having said that it is impossible to time the markets, which is why investors suggest investing in a SIP.

Also read Why SIPs are not the best at all times?

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