As an investment vehicle, mutual funds offer investors great flexibility in selecting modes of investment and asset classes. There are primarily two ways to invest in mutual funds- systematic investment plan (SIP) or lump-sum mode. The choice should ideally be made after assessing factors such as individual risk appetite, market conditions, and the type of underlying asset class.
SIPs or systematic investment plan, in particular, have recently gained a lot of popularity. They allow investors to regularly invest a small amount of money over a period of time.
Investors build a sizeable corpus through regular investments since the SIP is made on preset dates and with a predetermined amount. The best part is that it can be started with an investment as low as Rs. 500 and works best for salaried individuals and low-income investors.
In this blog, we learn more about mutual fund SIPs, along with the pros and cons that you need to know about.
Pros of Investing in SIPs
Some of the advantages of investing in SIPs include-
- Inculcates investment discipline
SIPs are an excellent investment vehicle that inculcates discipline and encourages the habit of saving before investing. They allow you to regularly (weekly, fortnightly, monthly, or quarterly) invest in various schemes, which is a much easier and convenient option to maintain in the long run.
For example, if you decide to do a monthly SIP planning of Rs 1000 in a hybrid fund, the amount will be auto-debited from your bank on a specified date account through ECS or PDCs.
- Provides compounding benefits
Since SIPs do not require a commitment for a large investment amount and keep you invested with a low sum each month, it allows you to begin much early in life, thus giving the advantage of the power of compounding.
- Mitigates risk
With SIP plans, investment is made at regular intervals over a long period, allowing you to mitigate the risk of market volatility. It allows you to buy a mutual fund at multiple price points, thus helping you decrease your purchase costs and increase your chances of earning profits. This kind of rupee-cost averaging helps to even out the volatility.
- Convenient
Systematic investment plans are quite simple to set up and monitor. Once the initial paperwork is completed, the amount will be automatically deducted from the bank on the specified date, thus saving you the hassle of managing manual investments.
- Flexible
Due to low investment amounts and the availability of multiple payment intervals, SIP plans allow the investor to time the investment as per his/her income flow. Hence they offer better flexibility and do not put undue pressure on your existing financial resources.
- Cons of Investing in SIPs
The main disadvantages of investing in SIPs include-
- Uniform investment through market ups and downs
With mutual fund SIPs, an investor cannot immediately change the amount being invested in response to market ups and downs. This prevents the investors from taking benefit of market upswings.
- Not suitable for irregular income flow
Systematic investment plans aren't suitable for investors without a reliable and regular income/ cash flow as the investment in SIP plans needs to be made at predetermined intervals.
- Need for maintaining required funds
In the case of mutual fund SIPs, if an investor fails to maintain an adequate amount of balance in the bank on the preset day of debit, the PDC or ECS will be dishonored, and there will be no investment for that particular month.
- To Wrap up
A systematic investment plan is one of the most popular as well as preferred forms of mutual fund investments today. Mutual fund SIPs promise excellent returns on your investment and allow you to accumulate wealth in the long run. However, since SIP plans are subject to market conditions, it is recommended to assess both the pros and cons before investing in the right stocks to help you meet your financial goals.
If you are also looking to invest in SIPs and achieve your financial goals leveraging the expertise of experienced investment teams, PGIM offers a broad range of solutions in mutual fund SIPs. Reach out to them today to learn more about investing in systematic investment plans.
