Why Systematic Investment Plans (SIPs) Are Not Always Good

SIPs or systematic investment plans have become a common buzzword in personal finance. SIPs are generally understood to be a regular investment in Mutual funds or stocks. Most financial advisors suggest that SIPs are an essential investment tool for retail investors for meeting their financial goals. SIPs are nowadays advised for almost every situation and investor. While SIPs have lots of benefits, they have major disadvantages as well.

One thing about SIPs that is not talked about is that SIPs will give subpar returns in overvalued markets. The returns of SIPs in the future can’t be extrapolated from the past as the Indian markets have a limited history. There have been cases where stock markets have given flat to negative returns for long periods of time. For instance, the Japanese market from 1989 to 2022, the USA from 1929 to 1945, and even from 2000 to 2008. While I am not suggesting that SIPs will always give bad returns in India, it is a possibility that you must consider.

SIPs are not always riskless products like government bonds, etc. so you always require to diversify your asset allocation. Last year the Indian market gave a ~2% return which was lower than returns on fixed deposits or even savings bank accounts.

A safe SIP is not only in equities but across many asset classes which can be gold, real estate, fixed income, etc. Blindly investing through SIPs in overvalued markets is a sure-shot formula for failure. The Indian market is regularly receiving around Rs.10,000-12,000 crore of SIPs every month with a small ticket size. Don’t think it is a good time for high equity allocation as fixed income seems attractive. Even the real estate cycle has shown an upturn in the last couple of years.