Disadvantages of SIP

Discussion in 'Mutual Funds Discussion Forum' started by jaypac, Jan 1, 2012.

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  1. jaypac

    jaypac New Member

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    Hi, although SIP has many advantages like promoting disciplined investing, I'm trying to figure out the disadvantages of investing through SIP(Plain SIP, where your money is debited from your bank account every month or so). I thought of a few. Hopefully you guys could add more to this list.

    1.)SIP's are good in a volatile market. However in a bull market, SIP's can become an costly affair, with your average cost price increasing with each investment.
    2.)If you had an lump sum amount to invest and opted for the SIP route, most of your money would be sitting idle in your bank account earning (4-6)%. In that case, would you have been better off, if you have made an lump sum investment in a liquid fund and opted for an STP.
    3.)SIP's happen on a fixed date.So let's say your SIP date is on 7th of each month, and the market ran up 200 points on these 7 days where you make your purchase and on the 8th day market tanks 350 points, you are actually left wondering if you could have made your investment on 8th. I'm not talking about market timing , I'm just saying if the SIP could be triggered in case of a market downfall. Lets say you have 1000 to invest (500 fixed on a particular day) and the remaining 500 would be triggered in case of market downfall. Adding a active style of flavor to a passive style of investing such as SIP. I don't know if there are options already available on this. I have heard about Flexi SIP, probably that could be the answer.
    4.)And if you are looking for a 15-20 year period, does it actually matter if you have made an SIP or an lump sum investment.

    Please share your thoughts.
     
    Last edited: Jan 1, 2012
  2. KoolSIM

    KoolSIM Member

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    Here are my thoughts on the points you have raised so far.

    A few months ago, this point was touched upon in an ET article. Some past history was used to research this point. The article pointed out that in a continuous upmarket, SIPs lose out in returns compared to a lump sum but not by much. If I can jog my memory, I believe the difference was hardly 2 - 3% over a long period.

    My opinion on this is that since using an SIP, I am reducing my risk of market timing (I don't believe anybody can time the market).......my return will be albeit slightly lesser because of the slightly lesser risk. So I wouldn't look into this disadvantage at all!

    This is apparently a good way to invest if you have a large sum in a bank account through which SIPs are taken out for equity funds. A lump sum investment into a liquid fund and an STP into an equity fund thereafter, is nothing but a slightly complex (or structured if you want to call it) SIP. If one has the money lying idle and doesn't mind the slight complexity in this transaction, I feel this is a better way to invest because you get a chance to pocket some less risky liquid fund returns over bank rates while you wait to make your SIPs.

    Otherwise, for people like me who depend on their monthly paychecks to make equity fund investments, SIPs are the way to go.

    This is indeed a disadvantage, but short-term market volatility is irrelevant over the long term in most cases. If one is experienced enough to judge the pulse of the market, they can make a rough guesstimate of a particular ideal range of dates to invest depending on whats happening in the market. In such a case, one would do without an SIP agreement with the mutual fund and instead invest directly the same amount in the funds that they would have through an SIP on an 'ideal' date. This method is also an SIP in a way, just not a computerised one.

    I haven't explored Flexi SIPs that much, but there are funds that let you invest on more than 1 date in a month. So you could fix up an SIP that would make a weekly withdrawal or a fortnightly one instead of a monthly one. Sometimes you can choose which dates too. This way you can spread out your risk a bit. Instead of investing Rs. 4,000 on 15th of each month, invest Rs. 2,000 each on the 7th and the 21st of each month.

    The ET article that I mentioned earlier says that an SIP wins over a 15 - 20 year period where both bull and bear markets are present. Over an entire market cycle of both ups and downs, an SIP wins hands down! At least thats what history suggests! :)
     
    RAJESHROHRA likes this.
  3. prst

    prst Well-Known Member

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    One drawback that I could think of, is the high transaction charges due to frequent trades. if your transaction cost is low, then the broker will charge the minimum holding charges, in addition to the brokerage.
     
  4. bhvm

    bhvm New Member

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    Well Said.
    Most people don't know Disadvantages of SIP. AMCs are just pushing SIP as a golden thing.
    For moderately advanced investors, SIP does not make sense.
     

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