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Can the Best Mutual Fund SIPs Disappoint You?

19 July 2022

How many of you invest through SIPs? I'm sure there are a lot of you. For good reason, the SIP (Systematic Investment Plan) route to investing in Mutual Funds has grown in popularity among retail investors in recent years. But, as we all know, there are always two sides to every coin. Without a doubt, SIPs are the best way to invest, especially in equity funds.

However, SIPs can let you down at times. While SIP investing is a good option, many people are more familiar with the benefits than the drawbacks. Let's see if the Best Mutual Funds for SIP investment could let you down or not.

Meaning of SIP

A Systematic Investment Plan is an option available with Mutual Funds. SIP is a method of investing money in Mutual Funds on a regular basis. The most well-known frequency is monthly. With the benefit of rupee cost averaging, investing in Mutual Funds through the SIP mode becomes the most advantageous option. Instead of investing in a lump sum, SIPs invest on a regular basis at weekly, monthly, or quarterly intervals. In this case, you will divide your planned lump sum investment into 12 equal parts.

For example, if you plan to invest $120,000 in March as a lump sum, you will invest $10,000 per month in a SIP.

Reasons You Should Invest via SIPs

  1. Overall Great Performance

It is one of the best ways to invest and a tried-and-true Method of Risk Management. Aside from that, you can enjoy good returns by making regular, periodic investments over a long period of time.

  1. Higher Returns in The Long-Run

The obvious advantage of SIP is that it allows investors to average the rupee cost of a unit, allowing them to earn higher long-term returns.

  1. Financial Discipline

It also enables them to invest in a disciplined manner regardless of market conditions. SIPs automatically enforce financial discipline.

  1. A Benefit During Volatile Market Conditions

During volatile market conditions, such as the one we are currently experiencing, a SIP can be a blessing in disguise for the average investor. As more units of the subscribed fund are available at the corrected/lower price. As a result, investors receive their units at a lower average cost and, as a result, higher returns when the market improves.

  1. Low Minimum SIP Amounts

The minimum SIP amount can be as low as Rs.100 so that the maximum number of people can start investing in mutual funds.

Under What Circumstances Can SIPs Disappoint You?

No matter how good your investments are, an exception is always in place. Sometimes the Best Mutual Funds do not deliver the expected returns, which often leads to disappointment.

So, further, I would like to highlight a few key points that may disappoint you even if you're investing in the Best SIP Plans for Mutual Funds:

  1. The Time of Starting & Ending a SIP

The timing of entry and exit is critical for SIPs; if you enter in the bear phase and exit in the bull phase, your returns will almost certainly be good, and vice versa.

Let me illustrate this with an example.

If you choose Rs.1000 Monthly SIP for a year, you will buy units at a specific NAV each month (Net Asset Value). When you started the SIP, NAV was Rs.40 and when you stopped the SIP NAV was Rs.43. During 12 months, NAV reached a peak of Rs.48. For 12 months, your average NAV cost was Rs.45. This implies that the market peaked during these 12 months and you purchased at a high rate, because of which your average is as high as Rs.45, but at the end of the SIP, NAV is Rs.43.

  1. Insufficient Cost Averaging

Cost Averaging is probably the biggest reason or the single most important selling point of SIPs. Now think about it, by making monthly investments, you end up making only 12 investments per year. It’s next to impossible to achieve an accurate average by capturing the market only once a month.

You are going to miss dozens of market highs and lows that will take occur between your consecutive SIP installments. If SIP were a bi-monthly, weekly, or daily regime, the cost of averaging would have been really good and certainly better than a monthly regime.

  1. SIPs Are Not Always the Better Alternatives

There is a common misconception that SIPs are always preferable to lump-sum or one-time investments. However, there are times when SIPs work and times when they do not. Lump-sum investments outperform SIPs during rising market periods. While SIPs are good at ensuring regular investments, they don’t improve your returns compared to lump-sum investments, in all kinds of market situations.

Deciding between lump sum investments and SIPs is a matter of assessing whether markets have a higher downside or upside from your starting point. While that is not easy, broad market valuations can be a good guide.

  1. Less Control

In a way, SIP is a rigid product.

How?

You are investing a fixed amount in a Fixed Mutual Fund Scheme, if you want to change the scheme or the amount, you need to stop the first SIP and start a fresh one. For example, you start a SIP of Rs.5000 every month. Now, after a few months of investing, you want to increase your monthly SIP installment by Rs.2000. In such a scenario, you can't just add Rs.2000 to your existing SIP plan.

You have to start a fresh SIP in the same fund with Rs.2000. An investor cannot immediately change the amount being invested in response to the ups and downs in the market. This keeps the investor from taking advantage of the upswings.

  1. Does Not Suit Investors with An Unpredictable Cash Flow

Think of someone who doesn’t have a predictable cash flow like a self-employed professional. He won’t be able to stop a SIP, as he would be unable to commit a fixed sum every month, thus, it is safe to say that these plans do not always suit investors with an unpredictable cash flow.

Conclusion

SIPs protect you from a variety of threats. Short-term risks, short-term volatility, emotional and impulsive reactions, overspending, and so on are examples. But keep in mind that SIP is not a magic wand, so do your homework before investing in any mutual fund or SIP.

The timing of your entry and exit is critical, and only timing determines the performance of your investment. And, yes, your mutual funds will occasionally fail to deliver the expected returns, which can lead to disappointment.

As a result, I would like to highlight a few key points to consider before investing via SIP:

  • Read how SIP and Mutual Funds work.
  • Research the sector and plans in which you want to invest.
  • Analyze the performance, like monthly returns, annual returns, and 5 years returns.
  • Don't forget to see the rating of the specific Mutual Fund that interests you.
  • Keep visiting your SIP account within 5 - 6 months to check its growth.
  • Also, do not fall for the marketing gimmicks of such low-priced SIP options from different mutual fund vendors.

What you need to do is decide on the amount and the time horizon for which you want to invest and select a SIP option for investment as per your investment goals.

Investing in Mutual Funds online is very simple and paperless. Simply log in to your Groww account, choose a fund, and invest using net banking – exactly like you would when shopping online.

You may also want to know more about the Best Mutual Fund SIP Plans to Invest in 2022.

Happy Investing!

Disclaimer

The stocks mentioned in this article are not recommendations. Please conduct your own research and due diligence before investing. Investment in securities market are subject to market risks, read all the related documents carefully before investing. Please read the Risk Disclosure documents carefully before investing in Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges. As investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the investment objectives shall be achieved. NBT do not guarantee any assured returns on any investments. Past performance of securities/instruments is not indicative of their future performance.
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