Some of the important points of the disadvantages of SIP are given here which investors should keep in mind. The biggest disadvantage is low returns, due to which investors may find it difficult to achieve long term financial goals.
Apart from this, high expenses, market fluctuations, high-risk strategy, concentration risk, exit load, and lock-in period are also disadvantages of SIP.
You should read carefully about all these disadvantages of SIP investment because investing without the right information related to SIP investment can also cause you a lot of loss.
Below we have explained one by one what can be the disadvantages of SIP, all of them with examples, so read this post till the end.
(1) Disadvantage of market risk in SIP
Market risk in SIP means that the value of the investor’s mutual fund units may decrease due to market changes. This is the risk (loss) in every market-based investment.
A simple example of this is that if you have invested in a SIP plan and there is a sudden economic slowdown or a crash in a specific sector, then the value of your mutual fund units may decrease. Hence, it is important to always keep market risk in mind.
(2) SIP investors have to depend on the fund house
Another disadvantage of SIP investment is that the investor does not have direct control of his invested funds as the fund management is in the hands of the fund house.
- This means that the SIP investor has no right to make investment decisions, select stocks and manage the portfolio.
- The control is only with the fund manager.
- This can make some investors feel a lack of control over their investment and they may doubt their performance.
- But due to portfolio management by the experienced fund manager of the fund house, the returns of the fund can also be better.
Therefore, investors should take into account the past performance of the fund house and expertise of the fund managers and then take a decision.
(3)There is no guarantee of returns in SIP investment
The third disadvantage of SIP is that there is no guaranteed return. The return of your SIP investment depends on the market conditions and the performance of the fund. This means that in some times SIP investments can give higher returns, but sometimes due to market downfall, SIP returns can also be low.
Therefore, while investing in SIP, investors should plan for long term investment and also consider market risks. Also, realistic expectations should be set for SIP investment, which means we should not expect to earn quick returns from SIP investment.
(4) Inflation causes losses to SIP investments
The next big disadvantage of SIP is that it is also affected by inflation. Inflation means that the value of money decreases over time. If the return on your SIP investment is less than the rate of inflation, then understand that the real value of your investment is decreasing.
Therefore, investors should also consider the inflation rates while selecting funds for SIP investment and select funds that offer better returns than inflation.
(5) SIP mutual fund expense ratio is very high
The fifth disadvantage of SIP is that the Expense Ratio can be very high when investing in some mutual funds through SIP. Expense Ratio is the fee charged by the Mutual Fund company for its expenses.
This means that the Mutual Fund company can charge the investor for the expense ratio for the management and administrative expenses of the fund.
If the Expense Ratio is high, then the returns of the fund can also be less. Therefore, investors should keep the Expense Ratio in mind while choosing mutual funds. You will get information related to Expense Ratio in the offer document of the fund house.
(6) There is a charge for withdrawing money in SIP
The next disadvantage of SIP is that some mutual funds charge an exit load. Exit load is a penalty that is levied when an investor withdraws his mutual fund units early.
If you redeem your units early, i.e. take your money out of the SIP, the fund company charges you a penalty for exit load.
Exit load is normally charged as a percentage and varies according to the tenure. If you make SIP investments for short-term goals and redeem your units early, you may suffer losses due to exit load. Hence, investors should also consider exit load while choosing funds.
(7) Impact of lock-in period in SIP
The next disadvantage of SIP is that some mutual funds have a lock-in period. The lock-in period means that you can exit your investment only after a specific period.
- The duration of the lock-in period is mentioned in the offer documents of the fund. If you redeem your units in between the lock-in period, the fund house charges you a penalty.
Due to the lock-in period, investors may have restrictions in liquidating their funds. Hence, investors should consider the lock-in period while selecting the funds and set the duration of the lock-in period as per their financial planning
(8) Disadvantage of concentration risk in SIP investing
The next drawback of SIP is that some mutual funds have concentration risk. Concentration risk means that the portfolio of some mutual funds may have a high concentration in the stocks of a particular sector, industry or company.
Therefore, concentration risk must be taken into account while making SIP investment.
For this, you should select mutual funds with diversified portfolios, which have very low concentration risk. Complete information about investing shares in the portfolio of diversified funds is available in the offer document of the fund house.
(9) Some SIP investments have the risk of loss
If your financial goals are for long term, then you can invest in funds with high risk strategy, but for short term goals you should not invest in funds with high risk strategy.
- If you invest money in funds with high-risk strategy, you can get higher returns but you will also have to take high risk in this investment.
Your financial goals are for long term, then you can invest in funds with high risk strategy, but for short term goals you should not invest in funds with high risk strategy.
(10) Investments in SIP need to be tracked
The last disadvantage of SIP is that your investment value may fluctuate due to market volatility. Market volatility means that stock prices keep fluctuating.
- If you invest in equity funds, the value of your funds may fluctuate due to market volatility.
- If there is positive sentiment in the market, the value of your funds may increase but due to negative sentiment the value of your funds may decrease.
Therefore, investors should keep track of their investments due to market volatility and invest for a long period while making regular investments.
Apart from this, you should not panic if the value of your funds decreases due to market volatility because normal returns are also high when investing in equity funds for the long term.
Know – How to invest in SIP?
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