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Basics of SIP Investment - Advantages & Disadvantages

What are Systematic Investment Plan (SIP) facilities under mutual funds?

Systematic Investment Plan (SIP) facility through which you may investment in Mutual Fund schemes wherein you pay a set amount every month/quarter/half year for a set tenure. For example, if you take an SIP of Rs. 8,000 for 1 year on January 1, 2014, you will be paying Rs. 8,000 per month for next 12 months.

The statement “Small is Powerful” intends to market the idea of SIP that aims to convert small investment into larger investments over a span of time. Since the amount is invested regularly and is constant, you get additional number of units in the falling market and fewer units when the value is high. It helps you to smoothen out the market fluctuations and therefore the investments are a low cost over a period.

When should you invest in mutual funds through SIP?

SIP is beneficial as long as markets really are volatile or going down after you invested. If, at all, the markets turn bullish and start rising, SIP won't be beneficial, and may give less returns compar​ed to lump sum investments. SIP is a simple concept and hence very powerful. Let’s see some factors as to why it’s worth investing through SIP mutual fund.

Why should you invest in SIP?

  • It is easier for a person to shell a smaller amount every month rather than a big amount all at once. Investing through SIP is lighter on the pocket. It’s easier to pay Rs 8,000 per month for a year, instead of investing Rs 96,000 at the same time.
  • The major advantage of SIP is a concept of rupee-cost averaging. SIP allows you to buy more units as the market goes down and fewer units as markets moves up.
  • The other advantage of SIP is that it trains you to become a disciplined investor. Once you begin SIP, every month you have got to contribute certain money in mutual fund and that habit is cultivated.
  • SIP presents a very convenient way of investing. It is only required to submit a filled up enrolment form along with a cheque, which is to be deposited on the date requested by the mutual fund. Thereafter, units will be credit to your account & a notification will be sent out for the same.
  • Capital gains, if applicable, are taxable on a first-in, first-out basis.

Are there any disadvantages?

  • SIP investments don’t work in bullish markets or when market rises up over time. When market goes up and keeps growing over time, the units bought each time are at high value than the previous one, which can ultimately bring the average value up, compared to the lump sum investment at the beginning.
  • Tax saver Mutual Funds schemes lock your money for three years, once you invest through SIP; all of your investment is locked individually for three years from the date of investment. Therefore if you pay your initial installment on January 2014, it'll be locked until January 2017, and then the installments paid in February, 2014 is locked until February, 2017 and so forth.

The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. Certain factual and statistical information (historical as well as projected) pertaining to Industry and markets have been obtained from independent third-party sources, which are deemed to be reliable. It may be noted that since NAM INDIA has not independently verified the accuracy or authenticity of such information or data, or for that matter the reasonableness of the assumptions upon which such data and information has been processed or arrived at; NAM INDIA does not in any manner assures the accuracy or authenticity of such data and information. Some of the statements & assertions contained in these materials may reflect NAM INDIA’s ​views or opinions, which in turn may have been formed on the basis of such data or information.

Before making any investments, the readers are advised to seek independent professional advice, verify the contents in order to arrive at an informed investment decision. None of the Sponsor, the Investment Manager, the Trustee, their respective directors, employees, affiliates or representatives shall be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.




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