Disadvantages of SIP Investment You Should Know

For a long time, the stock market was seen as a platform for the affluent people where the rich get richer by making money from their existing wealth. However, with the introduction of SIPs this myth was broken where now you don't need to be rich or have existing wealth to make money from the stock market.  

Systematic Investment Plan or SIP is one of the most popular and inclusive methods of investing in the stock market. With this method, investors put a predetermined set amount in mutual funds or other asset classes at regular intervals such as monthly or quarterly instead of investing a lump sum amount.  

It promotes inclusivity as you can reap the benefits of the stock market even with a small amount as low as Rs.500. Additionally, it promotes the discipline of investing regularly in the stock market as well as reduces the impact of market volatility by reaping the benefits of Rupee Cost Averaging.  

However, despite these benefits of SIPs, it has some downsides too which being prudent you should be aware of.  In this blog, we have highlighted some of key disadvantages of SIPs which will assist you in making better decisions with regard to your investments. 

 

 

Disadvantages of SIP 

Here are the major disadvantages of SIP which you should know before investing:

 

1). Not a full-proof solution of volatility 

While SIPs are looked upon as a shield against market volatility, they cannot eliminate it completely. Despite doing SIP your portfolio could go down during market downturns especially in the short run. SIP works on the principle of rupee cost averaging, major stock market crashes and extended bearish runs can affect your investments negatively and it is important to keep this in mind before opting for SIPs. 

 

2). Lock-in periods and exit loads 

Lock-in periods and exit loads are another aspect of SIP which you should consider before choosing one as they affect your financial flexibility. Lock-in periods are mostly applied in tax-saving ELSS, where you can't access your funds for a set period. (generally 3 years)   

It means that your access to your funds is restricted even in case of emergency situations, and you can't access these funds before the lock-in period ends. In the case of non-tax-saving SIPs, there are also exit loads which you need to bear if you go ahead with your withdrawals before the predetermined time period.  

Both these lock-in periods and exit loads are put in place to promote investing in stocks for long term and it is important to consider your financial position and short-term fund needs before opting for schemes which have the above conditions. 

 

3). Not best for short-term gains 

SIPs weave their magic in the long-term with the help of compounding as it is not a good option for swing traders or those who are looking for short-term gains. In the short run the stock market is volatile and there are higher chances that your portfolio could give negative or lower returns during this period as compared to the long term.  

So, if you are ready to stay consistent in the market for the long term then SIP will work well for you otherwise it may not meet your expectations. 

 

4). Fund-management expenses 

While SIPs can be done in various asset classes, the most common ones are done in mutual funds. These mutual funds are managed by professional fund managers who take management fees for their services and expertise known as expense ratios. Essentially, a small portion of your investment goes towards the management fees.  

Although this portion may look nominal but over time these charges accumulate and eat into your returns which you would have received otherwise. Therefore, it is advisable to take expense ratio into consideration before choosing an SIP and go for a reliable and lower one wherever possible. 

 

5). Lack of knowledge 

Over the years the popularity of mutual funds and SIPs have grown significantly which has led to many options in the market to choose from. With so many options and each with their own risks and benefits, it becomes complex for investors to choose the right one without proper knowledge. StockDaddy is your go to platform to get the desired stock market knowledge that will assist you in becoming financially independent.

Each investor has their own financials needs and goals, which is why it becomes important to do proper research and choose those funds which align with your needs as SIP is a long-term commitment. 

 

 

SIP vs Mutual Fund: Know the difference 

We often use the terms SIP and Mutual Fund interchangeably, but both have different meanings and usage. We already know about an SIP, now we will delve into mutual funds and understand the major differences between SIPs and Mutual Funds. 

A mutual fund is a substantial fund formed by pooling money from numerous investors in varied ratios. This fund is then strategically invested in various financial asset classes by professional fund managers using their expertise and experience.  

The objective of this fund is to diversify the investment to minimize risk and at the same time maximize returns. Another advantage of forming this fund is that it gives access to investors to a range of investments which could have been either of their financial reach or too risky to tackle separately. The key differences between SIP and Mutual funds are: 

 

	SIP	Mutual Fund
Definition	SIP is a consistent and disciplined method of investing in mutual funds and other asset classes.	Mutual Fund is an investment vehicle made from funds invested by numerous investors which are diversified over different asset classes.
Approach	SIP demands regular and disciplined investment at predetermined intervals in chosen mutual funds or asset classes.	Investment in Mutual Fund can be done through both lump sum and SIP.
Risk and Returns	SIP works on the principle of Rupee Cost Averaging which minimizes investor's risk associated with timing the market.	The degree of risk and returns associated with mutual fund depends on its types such as debt funds, hybrid funds etc.
Flexibility	The degree of flexibility in SIP is high as investors can change the amount and frequency of investments according to their needs.	The degree of flexibility in mutual funds is limited as you can choose from various types of funds, but they have limited control over individual investments.
Suitability	SIP is best for those who wish to invest consistently and build a large corpus over a long time.	Mutual Fund works better for those investors who have lump sum amount to invest and want diversified avenues.

 

 Wrapping Up 

SIPs rank among the preferred wealth-gaining instruments, although it is notable that they can't be beat. For you to effectively acquire your financial target, you ought to know what risks and disadvantages are involved and develop an investment plan that's well-informed.