When Sip Does Not Work

There are many widely-accepted conventional wisdom and thumb rules doing around in the investment world. One of them is to invest through SIP and see your money growing. Nevertheless, what they fail to disclose is conditions under which they work and when they fail to perform on the expected lines. If that is the case then why SIP is recommended?

SIP is for investors who are content with limited returns and want ease of investment in equity. It helps you to spread out your investment over a period which helps cover different market phases and hence averages out your purchase price. And since currently we are witnessing growth in the equity market, these SIPs are going to give a better return.

There are few basic assumptions that we make while opting for SIP which may or may not always hold true.

Market will keep on rising

SIP will help you to reap benefit of rupee averaging only if market is trending high. Nevertheless, if you started investing and market is seeing a continuous decline since then, you may see your returns negative. The ideal situation in which SIP works better is when you start investing when market is at a decline and where you can average your investment and after that market should inch up, helping you to make positive returns. For example, anyone starting SIP in the month of March 2015, on an average his investments would have not made money till February 2016, till when we saw market declining.

You invest in good performing fund

There are various funds that have the habit of underperforming their peers and benchmark. If you are unlucky enough to select those funds for SIP, your investments are sure to lag and will give poor performance. Hence, while investing through SIP selecting right fund makes sense.

You will benefit, when market is low

SIP allows you to buy more units when market is low. However, it does not mean you will invest more funds. Therefore, to take benefit of lower market level you can use Value Investment Plan (VIP), which allows you to do value averaging instead of cost averaging. Therefore, instead of blindly following SIP, you should always keep track of market condition, monitor the funds you have invested in, at times take advantage of lower market level.