SIPs have a few limitations that you must keep in mind before investing in them.SIPs have become indistinguishable from mutual fund investments these days. There is a strong perception that SIPs are the only way to invest in mutual funds, or at least the only safe way. Well, that may not be true always!
Mutual funds allow several types of investment options that include different types of asset classes, tax benefits, varying in terms of return aspects and risk thereto. In terms of investment style, they allow you to invest in a lump sum or through a systematic investment plan (SIP). As SIPs provide long-term rupee averaging, investors who are planning to create wealth gradually in the long-term prefer SIPs over the lump-sum investment option. However, SIPs should not be the de facto investment option for every mutual fund investment, and there are situations when investing through SIPs may actually prove counterproductive.
Here are some situations that you should be careful about when you plan to invest through SIPs.
When You Are About To Reach Your Financial Goals
One of the key purposes of investing via SIPs is to mitigate the volatility risk prevalent in the short term. SIPs are meant for long-term investment, so that the volatility in the short-term market is well taken care of. When your long-term investment grows and gets closer to achieving your target financial goals, it’s crucial to cut down the risk and shift the corpus to less volatile instruments to protect it from losses. At this point, continuing to invest through SIPs may not be a good idea. Even if the market is in an upswing, it is best to resist temptation and divert your investments to a low-risk product. Protecting the corpus should be your prime focus as you get closer to your financial goals.
When You Have A Big Amount To Invest
SIPs work well when you are investing a portion of your regular monthly income. However, if you have got a big lumpsum amount in hand, it’s not a good idea to invest small amounts every month via SIP and keep the large chunk in hand. For example, if you have Rs 10 lakh in hand and you plan to invest Rs 5000 every month in an equity fund through SIP, you will lose out earning a return on a huge portion of your corpus. Instead, if you plan to deploy the entire fund in a staggered manner, i.e., Rs 50,000/month for 20 months, it can give you a better outcome. Another way is to deploy the entire corpus in a low-risk mutual fund investment product to earn a decent return and gradually shift the money to another fund that has the potential to offer a higher return in the long run.
When The Selected Mutual Fund Scheme Is Not Doing Well
When you invest in mutual funds, it’s crucial to track the performance of your portfolio. Sometimes, some schemes in your portfolio may fail to perform as per your anticipation. If you continue to invest in a loss-making mutual fund that also doesn’t have the potential to recover, then you may make greater losses than you would have already incurred. The best way to avoid further losses and revive your portfolio is to stop the loss-making SIP investment immediately and switch the investment to a better scheme. It’s crucial to review your investment portfolio from time to time and take corrective measures if you’ve picked a bad investment. In case you suspect your fund is underperforming, make sure you monitor it for 3-6 months before taking a call. This is especially important if the market is volatile. If you remain unconvinced, then take a well-planned call on how you want to exit.
Always keep in mind, SIPs can help you reduce the risk, provided you have chosen the right fund. SIPs have a few limitations that you must keep in mind before investing in them. They are meant for the long term and may not give you a good return in the short term. You can’t invest and forget through SIPs. While you may not need to look at it ever so often, you would still need to keep track of your investments and stay updated. With a little diligence your SIPs can prove to be a great investment vehicle. Just make sure it isn’t your only one.
(The author is CEO, BankBazaar.com)
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