SIP refers to the systematic investment plan. It is a facility that the mutual fund offers to the customers or investors to invest their funds in a disciplined manner. SIP provides the facility to the investors to invest a fixed amount of money at regular predefined intervals in the various schemes of the mutual funds. The amount can start from as low as 500 rupees to that of a higher amount. The intervals of investment can be weekly, monthly, quarterly, or even yearly.
Mutual Funds are increasingly educating the customers on the need and the benefits of investing in a SIP. The advantage that the fund managers are citing is that the investor can gain by averaging the cost in a declining market which helps in spreading the risk.
But even after such an advantage that the fund managers are citing to the investors, some practical problems or disadvantages are associated with investing in a SIP. This article explains the disadvantages associated with investing in a SIP and what can you do about it.
Following are the problems and disadvantages associated with SIP:
- Low Returns Even In Constantly Rising Market- Mutual fund is a good way of earning good returns. SIP is one of the schemes of mutual funds which is considered to invest in, but the occasional lump sum investment that is being done when the market is being considered as a highly undervalued market can be profitable for the investor.
- Fixed Predetermined Amount Can Only Be Invested- At one point, an investor can have the capacity and willingness to invest a bit more in the ongoing SIP. Also, when the market is down, there may be a willingness among the existing SIP holders to invest more funds. But it is impossible to invest more than that of the predetermined fixed amount in the SIP.
- No Option of Stopping Intermediate Payment In SIP– In case of any emergency, if an individual has some significant expense to be incurred in a particular month and he doesn’t want to invest in that specific month. But this is not possible with SIP. The money would get debited and funded from the bank account if there is the money present in the savings bank account of that person.
The only way to stop investing is by canceling the SIP investment. However, if the SIP is blocked, there are again all the formalities and procedures to go through for starting a new SIP. Also, for cancellation of the existing SIP, it’s necessary to inform two weeks in advance. Still, there would be some chances of the money getting debited for that month if the cancellation process is not completed in time.
The way out for getting relief and avoiding such problems, the investor can remove the total amount from their bank before the date when the money gets debited. It can lead to a minimal charge by the bank in certain banks for non-maintenance of a minimum amount, but this in no way affects the investor’s credit score.
- Insufficient Funds In Bank Is A Problem– While investing in a Systematic Investment Plan, it’s required to choose one of the options from auto-debit from the bank account or submit post-dated cheques depending on the case. There is a problem with this option of paying money. If there is a shortage of an adequate amount in the bank account at a certain point in time, the cheque may get returned or get bounced, and the instruction of the ECS would also go dishonoured.
So for SIP investors, it’s important to keep sufficient funds to avoid such circumstances. Suppose any mechanism exists with the mutual fund company to provide earlier information regarding insufficient funds in the investor’s bank account. It is essential to ask for it and avail the same to avoid such problems.
- Not Suitable for Persons With Unpredictable Cash Flows– Systematic Investment Plan is not suitable for people who have an unpredictable cash flow. SIP needs to be fixed, and predetermined investment and inconsistent cash flow can create problematic situations for the investor.
For example, for a self-employed person who doesn’t have a fixed income every month, it’s risky for him to invest in SIP schemes. So it’s recommended to invest in SIP.
