What Are The Demerits Of SIPs?

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The way Systematic Investment Plans (SIPs), is sold these days, it is as if, you are going to end-up making money all of the time. The problem is that SIPs have their own demerits or disadvantages. Ask those who invested in SIPs in the last two years, whether they have made more money than bank deposits.

 What Are The Demerits Of SIPs?
In fact, Recurring Bank Deposits were offering interest rates of almost 9-9.50 per cent two years back. In any case, it is not that they can always make money or always lose money.

The point we want to make is this: If you do not time the market, the chances of making money through SIPs can be dim.

Now, let us cite this with an example. If you have been investing money in SIPs in the last two years, you would realise that for the whole of last year, you have bought into markets at average index levels of close to 27500 points.

What this means is that you are now buying at lower levels to average that cost (Sensex now at 24,900 points). Now for you to make it a zero sum game, the Sensex has to be back at 27,500 points by the end of this year. By the time that happens you realise after 2 years, you could be where you are.

But, that should never be the case. The Sensex should be around 32,500 points, since we have to factor in interest cost you lost for two years, which you would have got in recurring deposits. Now people who invest this year at low levels could gain, as the indices are low, rather than people who invested in 2015, when the Sensex hit a historic-peak of 30,020 points.

So, investing is also all about timing the market. So, as such SIPs do come with demerits and disadvantages.

SIPs do require a lot of patience

Systematic Investment Plans or SIPs require a lot of patience, like buying shares. If you think you are going to make money in a couple of years, the answer would again depend on the timing. For example, those who invested in SIPs, three-four years ago, could have encashed their holdings with superb returns in Jan-Feb 2015, when the markets were buoyant. Those who hung on may still be regretting. Having said that, you cannot time the market to perfection, which is why SIPs are advantageous.

So, it is again a matter of timing and patience. Having said that we still believe with the markets at 24,900 points, it maybe a good proposition to invest now, to reap rewards as the markets are now trading lower.

GoodReturns.in

Read more about: sips, mutual funds
Story first published: Monday, February 1, 2016, 10:08 [IST]
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