List down the advantages and disadvantages of SIP

You must have heard about SIP i.e. Systematic Investment Plan, which is known as one of the best and reliable ways of investing money. You should know that SIP is not a financial instrument. SIP is same as to recurring deposit, only the difference here is the amount is invested rather than just keeping it aside. A lump sum investment is a one-time activity while a SIP happens at regular intervals; in other words, it is a periodic investment option. In this case, a small amount of money is invested over a regular interval of time and this money is invested in a stock market that generates the return over time. SIP is considered as a safe way of investment as a relatively small amount of money is invested over a certain time in comparison to lump sum money at once.

You need to know that SIPs are just a mode of investment. Many of investors think that it is a fund or a tool where you can invest. That’s why it doesn’t represent any asset class.

Have a look at advantages and disadvantages of SIP-

Advantages of SIP-

This financial tool will help you to reap money step by step over a period of time. It helps you to fight inflation in the following ways. The advantages of SIP are stated below.

• It is easily affordable-

The investment amount can be as low as INR 500. So, it doesn’t cost much to your savings and allows you to achieve your goals accordingly. This also allows the investors to invest a small amount of money periodically.

• Learn the habit of saving-

It helps to inculcate a good habit of saving and also makes you more committed towards your investment. As monthly installments are deducted automatically from your bank account.

• Hassle free process-

The process is carried out in a complete hassle free way. The allocated amount will be withdrawn from your bank account. Thus, this gives you the benefit of not missing any monthly installment by sending an instruction to your bank. Thus the investment is done in a very convenient way and also in a smart way.

• The power of compounding-

The roads towards building wealth go towards starting the investment with a small amount of money regularly and reap the benefits from it. When you decide to invest for a longer period, you start earning returns on your returns. Since mutual funds in SIP are installments; they are compounded and thus help in building a large corpus. This also helps in achieving your long-term financial goals with regular investment.

Disadvantages of SIP-

• Insufficient cost averaging
• It doesn’t hold any exit strategy
• SIP doesn’t guarantee the returns
• When the market is consistently rising, then SIP returns seems to be at very lower rate
• You have limited options when it comes to the dates
• It has a fixed amount
• Stops intermediate payments

Every investment has some pros and cons. In spite of these disadvantages, SIP allows you to invest for a more extended period, by reducing the market risk and thus helps you to build a good portfolio, which can be later used to achieve your financial goals.