Systematic Investment Plans (SIPs) have become the most popular investment option for investors these days.
Mutual funds are increasingly educating investors on the need for investing through SIPs. The mechanism of investing in the scheme is through regular monthly investments. The one advantage cited by analysts, fund managers and investment advisors, is that you can gain by averaging costs in a declining market and thus spreading your risk.
Investing in Systematic Investment Plans would mean that you give instructions in advance or post dated cheques as the case maybe. However, at times, if you do not maintain adequate balance the cheque would be returned or the ECS instruction would also go dishonoured. The best way would be to ensure there is a balance in the account at all times.
If there is a mechanism that the fund house could alert you that there is a SIP due, you can ask them for the same. Or else, make sure that you intimate the fund house in advance not to deposit the cheque.
Problem from the fund house
This may not happen very often, but, it could happen that the fund house fails to deposit the post dated cheques that you have handed over.
SIPs help you make money by averaging cost (Is it always true?)
One of the disadvantages in an SIP is that it is sold, as if you will always make profits. Sometimes, the averaging cost may never work. What if the investor gets frustrated. Let us cite this with an example.
If you have been investing in the last one year through the SIP route, you could be a frustrated person today. This is because, your average cost throughout the year would have been high as markets were significantly higher for most of the year. Now in the last few months, they have dropped sharply. If, you have evaluated, the returns you have got in the last one year through an SIP, it could well be negative.
You cannot altogether discount the timing of the market, when you want to make money. It is perhaps the single most important feature for making money.
For example, the markets began the year 2015 closing at 27,507 points on Jan 1, 2015 and today we are at 25,191 points, a major drop since then. During the period, you would have been buying SIPs at higher prices through the year, except in Aug when the market fell. This means, you may not be in a good shape in Dec, with your SIP. Now, to recover the losses, you will have to wait for the market to go up.
So, it is not necessarily the case, that you will always make money by averaging. If the markets keep falling, you will keep losing money.
This is perhaps one of the biggest disadvantages of investing in a SIP.