Pros and Cons of SIP Investments
Imagine that you have a big amount in your hand, and you want to invest it in a profitable way. You would have heard a lot about Mutual Fund investments and want to try your hand at it. But, there are two ways to invest in mutual funds. Either invest the entire amount in one go as the lump-sum investment or make monthly investments through the best SIP plans. It might be difficult to choose which one would be the right kind of investment for you depending on your goals and expectations from this project. While lump-sum investment might feel like a more popular choice, SIPs wouldn’t be such a bad choice either.
To brush up, SIP refers to Systematic Investment Planning. Under this investment model, you are not expected to invest a lump sum amount in a mutual fund scheme in one go. You can choose the option of SIP if you do not have the funds for a huge investment, or if you do not want to invest a lot at this point. You can start small through SIP, and keep investing if you think that it is coming together to considerably increase your profit.
Below is a list of pros and cons of SIP Investments, which can help you understand SIP better and get an idea of what investing in SIPs entail in its entirety.
Pros/Advantages of SIP Investments
- Not many funds required – In order to begin with your Mutual Fund investments, you do not necessarily need a huge amount to begin with, (except lump-sum investments). SIP is a flexible type of mutual fund investments which allows you to choose when you want to invest a comparatively large amount and when a smaller amount. It doesn’t demand a large chunk out of your pocket in one go which is a definite advantage over Lump-Sum investment.
- Comparatively safer – As you are not investing a huge amount of money in a particular scheme at one go, it is safer for you as you do not have to expose all your funds to the highly volatile market. Smaller amounts keep the risks to a minimum and then you can consider your prospects to increase the amount respectively, or choose to end it if it seems to be under-performing.
- Cost-Averaging – SIP is all about investing in installments. It basically means that you will end up buying equities at different prices throughout the course of your investment. For instance – when the market is down, you will end up buying more units, and vice versa when the market is up. This means that the opening and closing prices will vary. Now to be fair to SIP, this could actually mean either profit or loss, depending upon how the market is going currently.
- Easy to start – A SIP mutual fund scheme is easy to start. You can start one quickly and without many formalities. There are no additional charges that are levied on you for availing a SIP mutual fund scheme.
Cons/Disadvantages of SIP Investments
- Not an Ideal Investment for people with unstable income – Since SIP essentially involves a monthly commitment on a fixed date without fail; it might not be a good idea for people who do not have a regular fixed income. Taking up a commitment to pay a specific amount every month might seem like a good idea when you have the money ready, but it will probably be a problem when you are in a crunch.
- Averaged Returns – SIPs average out your earnings because of the different prices of buying throughout the stipulated period.
- Extremely Complicated Returns’ Calculations – As the buying prices varies for mostly all the units, it becomes extremely difficult to calculate the returns on investment made. Calculating returns on your SIP investments involves complex calculations. But, SIP Calculator comes to the rescue and computes these complex calculations. You can calculate accurate returns using this online tool. In such a situation it becomes impossible to control your investments and oversee its progress.