SIP is one of the better disciplined mechanisms for investing in mutual funds, especially for students and employees with lower salaries who wish to build wealth in the long term. An SIP can be made with an amount as small as Rs.100. With regards to risks of SIP investment, there are no large risks, but certain disadvantages do exist.
- SIP is a cost averaging mechanism - works well when the market is going down, but may not be purposeful when the market is going up. In a rising market. The average cost of holding keeps increasing, thereby reducing the benefit.
- SIP prices may not the best - NAV of a mutual fund scheme is calculated based on the end of the day values of the portfolio holding and may not offer best pricing as in the case of ETFs (which are based on spot pricing). If a market is up in the morning and closes in the negative by evening, an ETF can be sold instantly in the morning to take advantage of the price, whereas a mutual fund NAV at the end of the day could be negative.
- Readiness of funds for SIP - Investors have to ensure that their bank account has the necessary funds available prior to the cut off time and date of SIP, failing which the execution for that month will not happen.
Inspite of these minor disadvantages, SIP is still the preferred mode of investing for active as well as passive investors who want to participate in equity markets.