The Advantages and Disadvantages of Investing in a Systematic Investment Plan

Financial decisions are always tough to make. Whether you want to make a call about buying a big-ticket item or investing your hard-earned money, it is always a good idea to analyse the pros and cons. This will give you the confidence that you are doing the right thing for your family’s well-being.

A Systematic Investment Plan (SIP) is no different. If you are considering opting for SIP plans, you may want to know the advantages and disadvantages to make an informed decision.

Benefits of SIPs

• Affordable — SIPs are easy on your pocket. They allow you to invest little by little every month so that your household budget does not take a hit. You can choose an amount as low as Rs 500 and select a frequency of fortnightly, monthly, or quarterly, as suitable.
• Easy to open — You can do your SIP planning from the comfort of your home. You can study the details of SIPs online and select the one that suits your budget and goals. Moreover, you can use online calculators to understand the monthly investment you need to make to achieve your objective.
• Secure — SIPs give you a cushion in the event of a market crash. In fact, when the market goes down, you get the opportunity to buy more units with the same amount of money. In the long term, it can increase your profits, giving you the benefit of the power of compounding.
• Ideal for stock market beginners — You do not require any stock market knowledge to invest in a mutual fund SIP. If you are investing a lump sum, you will need to carefully analyse the market or get expert counsel.
• Convenient — Your SIP account is connected to your account. It means you don’t have to worry about tracking the dates and ensuring that you transfer your instalment periodically. It happens automatically. You are only required to review your investment regularly to keep yourself updated.
• Discipline — If you are an individual who struggles with maintaining a savings regimen, SIP can help you immensely. As the money gets transferred from your account automatically, all you must do to earn interest is sign up for one.
• Exit — You can discontinue your mutual fund SIP at any time without any penalty. If you have invested in an ELSS scheme, you will have to stay invested for at least three years.

Disadvantages of SIPs

• Fixed amount — When you choose a SIP plan, a fixed amount gets deducted every month. You cannot change this amount during the tenure of your plan. It can become a problem if you do not have a steady source of regular income.
• Missing the payments — SIPs do not offer any provision for missing an instalment. You could have an emergency and may not have the cash flow to manage your upcoming instalment. It can be a nightmare to make this arrangement with your fund house.
• Not ideal for the short-term — You cannot always time the market due to its volatile nature. Suppose the market was high when you started investing and has fallen in the last couple of months. In this case, your investment would have bought you fewer units. The value of your investment will go down. Thus, it is advisable to invest in a mutual fund SIP only when you have a moderate or long-term horizon.

To Summarise

SIPs are ideal for individuals who want to accumulate wealth over the long term. It is also good for those people who struggle with maintaining an investing discipline. However, there are a few disadvantages that you may need to understand before investing in SIPs. After evaluating the pros and cons shared above, you can make an informed decision. PGIM provides you with a hassle-free platform to begin your investment journey with SIPs.