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SIPs: Not So Systematic After All!

24 Sep 2019

Systematic Investment Plans (SIP) in recent past have become one of the most popular investment styles for those who like to park their money in Mutual Funds. If you chat with any working professional, especially those who have just started their career, then you would come to know that the majority of them have already started SIPs with popular service providers like ICICI or HDFC.

Probably every household would have had (and continue to have) discussions related to mutual fund investments. In fact, even the ads promote it as being ‘Mutual Fund Sahi Hai’ (Mutual Fund is Right). But how many actually devote time to understand all the aspects of mutual fund investments?

Mutual Funds are rushing behind potential customers to educate them on the need for investing through SIPs. The mechanism of investing in the scheme is through regular monthly investments. Apart from the benefits there are inherent problems that can cause trouble for the customers.

1. Need To Maintain Funds:

Investors need to maintain balance in the linked account to not to let the ECS function go dishonored. For most people, maintaining sufficient balance and keeping track of all transactions may not be feasible. This leads to difference in expected versus actual outcomes.

2. Averaging Cost May Not Always Be Fruitful:

Sometimes, averaging the cost may not work at all. In case of a bear market, averaging is fruitful as it brings the cost down but in the case of bull market averaging often tends to increase the cost as markets were significantly higher for most parts of the year. So, it is not necessarily the case, that the investor will always make money by averaging.

3. Redeeming:

The time of redeeming the profits should be right. It is better to leave the profits in the pool and let it work as an investment so that the benefits can be reaped in the future. However, in order to do so, the SIPs need to be continuously monitored. This is a crucial task that not only consumes time but also requires patience as certain changes can induce emotional response which may lead to undesired outcomes.

4. Lock-ins:

Lock-ins are not good when someone invests in a market that changes the rate on daily basis. Lock in period can be the biggest flaw for of any investment, especially for mutual funds which has become a popular investment option for people today.

5. Under-Investing:

SIP is a form of expense for a general household so with respect to the income these households earn, ideally the SIPs should also go up and down. Basically, SIPs do not have any option of decreasing or increasing the amount according to monthly earnings. This can be considered to be a major challenge which people face. Due to the technical aspects and structure of an SIP, the investment amount cannot be modified but had there been an option for the same, it would have received more involvement from the investor and provided flexibility with respect to managing the investment amount.

6. Lack of Control:

A SIP investor does not have any sort of control over the assets on which the amount is being invested and hence they are helpless in terms of the return they get and are fully dependent on the Mutual Fund company. Just imagine the outcomes that would have been there if the investor was able to get clarity and choice of selection of stocks in the market. The lack of control over selection of stocks is the biggest disadvantage of investing in mutual funds.

Key Takeaways:

Systematic investment plans vary in complexity from simple to highly complex. Fees are sometimes hidden and fine print, which means the investor does not actually know how much they are paying for a certain service/ fund and whether it is possible to create its cheaper version on their own.

Our investment advisors recommend Market Neuron to anyone who looks to invest in the stock market with the intension of maintaining medium to long term investment. Market Neuron is an investment strategy based on fundamental analysis and ever since its inception, it has been outperforming mutual funds by a great margin. You can find a neuron to suit your investment style and market theme. There are over 30 neurons to choose from.

If you need help in selecting the best neuron for you, then contact us and get consultation from our experts today.

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As On 30th April, 2020
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