Is Investing in SIP Safe? Know the Benefits and Drawbacks

Systematic Investment Plan (SIP) has become one of the most popular investment options among retail investors in India. But is investing in SIP safe? What are the major benefits of SIP investment and potential drawbacks one should be aware of? Let’s find out.

What is an SIP?

A Systematic Investment Plan or SIP allows investors to invest a fixed amount regularly in a mutual fund scheme. SIPs allow investors to invest small amounts periodically, like monthly or quarterly, instead of making a lump-sum investment. The key benefits of SIP include rupee cost averaging, compounding, flexibility and discipline.

Benefits of Investing through SIP

Here are some major SIP benefits that one should consider: 

• Facilitates Regular Investments

SIP teaches the habit of regular investing by encouraging investors to save and invest small amounts every month or quarter. The fixed SIP instalment can be as low as ₹500 per month, making it an affordable route for retail investors.

• Power of Compounding

Compounding is one of the biggest benefits of SIP. Here, the power of compounding works to the advantage, as the earnings from the investments are reinvested to buy more units. Over long periods, this snowballing effect creates wealth.

• Rupee Cost Averaging

Investing a fixed amount regularly via SIP allows units to be bought at different NAVs (net asset value). More units are purchased when the NAV falls and fewer units when the NAV rises. This rupee cost averaging helps deal with volatility.

• No Need for Market Timing

Trying to time the market is very difficult. SIP investing takes out this need to enter/exit based on market movements. SIP commitments continue irrespective of fluctuations, resulting in earnings over the long term.

• Trains in Investing Discipline

SIP investing encourages financial planning and discipline as investors have to compulsorily save and invest the SIP amount every month or quarter. The regular commitment promotes the habit of long-term investing through bull and bear phases.

• Flexibility

One of the prominent SIP advantages is that investors can choose to increase, decrease or stop future SIP instalments based on changing financial situations. This flexibility allows one to customise investments to suit income flows.

Drawbacks of SIP Investment

While SIP is a beneficial route for long-term wealth creation, here are some disadvantages of SIP investment that one should consider:

• No Control over Timing or Scheme Choice

Investments happen on a fixed date irrespective of market conditions. After starting SIP in a scheme, switching to another option has tax implications, so the choice gets restricted despite changing scenarios.

• Longer Investment Horizon Needed

The benefits of SIP investing accrue meaningfully over longer durations of 5 years or more. Impatient investors may be disappointed by the returns in the short term. Temptation to stop SIPs mid-way can take away the advantage.

• Inertia with Underperforming Funds

Investors often continue with an underperforming SIP fund due to inertia. Instead of analysing and stopping non-performing SIPs, money keeps getting blocked despite weak returns. This takes away the portfolio upside.

Conclusion: Is it a Good Idea to Invest in SIP

SIP is undoubtedly one of the best investment options for retail investors to accumulate long-term wealth. It inculcates financial discipline, provides flexibility and helps deal with market volatility through rupee cost averaging. Investors just need to choose schemes judiciously, have realistic return expectations over the long term and avoid inertia with underperforming funds.

So, in summary, yes, investing via SIP is reasonably safe for most investors due to the inherent benefits stated above. One just needs to be aware of the importance of long investment horizons and be proactive in portfolio management for optimal returns. 

If you ever need liquidity before your SIP investments mature, Fibe Loan Against Mutual Funds offers an excellent solution. With this option, you can access loans starting from ₹15,000* instantly, with interest-only EMIs. The process is hassle-free, and you get disbursement in as little as 10 minutes, enabling you to manage financial needs without affecting your investment growth.

So, plan your financial goals, choose suitable mutual fund schemes for your risk profile and start investing small amounts regularly to grow your hard-earned money safely.

FAQs 

Is SIP better than FD?

SIP is a more effective long-term wealth-growth avenue compared to fixed deposits. Though FD offers assured returns, the returns are lower compared to the potentially higher returns from mutual fund SIPs over 5-7 year plus horizons. However, SIP carries some risk that FD doesn’t.

How is SIP beneficial for investors?

SIP allows retail investors to accumulate mutual funds regularly in small amounts. It provides inherent benefits like rupee cost averaging, the power of compounding, and financial discipline and helps reduce risks over the long term. For retail investors, it is the easiest route to reap equity-linked returns.

What is the ideal SIP tenure I should opt for?

Ideally, your SIP tenure should match your financial goal’s time horizon. For example, if you are investing for your child’s higher education 10 years later, ensure your SIP runs for those many years. However, even otherwise, SIP should be continued for a reasonably long duration of 7-10 years to maximise returns through the power of compounding. Avoid very short SIPs of 1-2 years only.

Should I stop my SIP during market downturns?

It is not advisable to stop your SIPs during volatile or downward-moving markets. In fact, market downturns present an opportunity to accelerate your SIPs as more units get accumulated when the NAVs are low. Your rupee cost averaging results in a ‘buying units low’ benefit. Stay invested with continued SIPs during both bull & bear phases rather than timing the markets.