Systematic Investment Plans (SIPs) in mutual funds are an investor favourite today. The primary reason for this is that SIP investments allow easy access to the stock market with little amounts of money. They also help create wealth over the long term through regular investments and build the habit of disciplined savings. Another major advantage of SIPs is that the need to time the market is done away with as they use the rupee cost averaging strategy. However, this does not mean that SIP investments are a winner over lumpsum investments in mutual funds. There is a purpose and time for each, and investors need to consider which option is the best for them at a certain point in time. Generally, here are a few situations when you should not invest in mutual funds through SIPs.
- When you have a large amount of money
When you have a large amount of money lying idle that you do not need to use in the short term, opting for SIP investments does not make much sense. For instance, if you received your year-end bonus or inheritance that runs into lakhs of rupees, making SIP investments of low amounts such as Rs. 10,000 a month will make you lose out on the returns that you can earn on your entire corpus.
- When you are about to meet your goals
SIP investments are meant for the long term as they help hedge short-term market volatility. Hence, when you are about to reach your financial goals, continuing with your SIP investment would not be the most strategic. For instance, say you started an SIP of Rs. 15,000 seven years ago to save up for the down payment of your first home. When your investment is in the sixth year and you are close to meeting that goal, stopping your SIP and switching to safer investment options such as debt funds would be a prudent move to consider. That’s because your investment no longer has the time to absorb any short-term market fluctuations that may come its way and the goal now is capital protection.
- When the fund is underperforming
Since SIP investments involve automatic payments every month, it might be easy to forget to track the performance of your mutual fund scheme. However, you must make sure to periodically review its performance and see how it’s doing compared to its benchmark index and the market. If the fund has been consistently underperforming, you should consider stopping your SIP and switching to another mutual fund that can help you meet your financial goals effectively.
Final words
While SIP investments in mutual funds are a great tool for investing, they should not be your default option in every situation. SIP investments should also not be your only investment vehicle. You need to consider how your investment needs change and how the markets are doing to know when to invest through an SIP and when to choose the lumpsum investment option. You should also use the lumpsum calculator and SIP calculator to calculate mutual fund returns and understand how these investment vehicles can help you meet your goals.
