Why SIP in Mutual Funds? Understanding the Benefits and Drawbacks

Published On 11 June, 2023 . By Dhiren Vaghadiya

Pros and Cons of SIP

Today money is crucial to live a good and happy life. Especially in old age when we are unable to earn money by working. So, Investing is an essential step for building wealth and securing a financially stable future. But the most important thing in investing is patience which is rarely seen in people.

That's why in today's era, SIP (Systematic Investment Plan) is the best option for ordinary people like us. Through this option, we inadvertently acquire the qualities of an ideal investor and can reduce market risks to some extent. However, like any investment strategy, SIP also has its own pros and cons. So with this blog, we will delve into the advantages and disadvantages of SIP to determine whether it is the right investment approach for you.

Pros and Cons of Systematic Investment Plan (SIP)

Pros of SIP

1. Disciplined Investing

One of the biggest advantages of SIP is its disciplined approach. By committing to regular investments, SIP helps inculcate a saving habit and encourages consistency in investing. This disciplined approach can be especially beneficial for individuals who struggle with unplanned investment decisions or find it challenging to save regularly.

2. Rupee Cost Averaging

SIP operates on the principle of rupee cost averaging. Since you invest a fixed amount at regular intervals, you can buy more units when the market is down and fewer units when the market is up. This helps mitigate the impact of market volatility, as you automatically benefit from buying more units at lower prices. In the long term, this strategy can potentially lead to favorable returns.

3. Flexibility

SIP offers flexibility in terms of investment amount and tenure. You can start with a small amount and gradually increase it as per your financial capabilities. Additionally, SIP is easily accessible, allowing you to start investing with as little as a few hundred rupees. This accessibility makes it an attractive option for individuals with limited investable capital.

4. Easy To Start

With the growth and development in the fintech industry, there are many discount brokers that provide people the facility to invest in mutual funds and stocks with low charges. Along with this, recently the government has started the structure of online verification and has also implemented many new rules for the protection of investors. This has made investing easier for common people.

5. Power of Compounding

SIP harnesses the power of compounding by allowing your investments to grow over time. By staying invested for the long term, you can potentially benefit from the compounding effect, where your initial investment, along with the accumulated returns, generates further returns. This compounding can significantly enhance the growth of your investment portfolio.

6. Diversification

The concept of diversification in investing has been popular for a long time, even Warren Buffett has recognized it. SIP in mutual funds gives investors effortless diversification and offers good returns in the long term with low risk. Nowadays, mutual funds are available in various categories such as industry, market cap and risk which further expands the diversification.

7. Professional Management

Taking the decision to buy or sell any stock is very time-consuming and troublesome for any investor. So by doing SIP in a mutual fund, you can certainly leave this decision to the fund manager. They are professionals in the field who take every decision based on the performance of the company. Thus you can invest your money without any stress and get good returns in the long run.

Cons of SIP

1. Market Risk

SIP reduces market volatility to some extent but it cannot completely eliminate market risk. For example, during a bearish market, your investment may experience a temporary decline in value. So it's important to be prepared for short-term fluctuations and maintain a long-term investment horizon to ride out market downturns.

2. Limited Control

While investing through SIP, the investment decisions are made by the fund manager. In this option, the investors have limited control over the portfolio structure and investment in shares. So, it is always crucial for us to choose a fund that best suits your investment goals and risk tolerance.

3. Liquidity Limitations

Although SIP promotes disciplined investing, it can lead to liquidity constraints. In some mutual fund schemes like ELSS, funds are locked for a specific time period, which may be challenging to access the funds in case of an emergency. So it's crucial to assess your liquidity needs and ensure you have sufficient emergency funds outside your SIP investments.

4. Dependency on Fund Performance

The returns generated through SIP are directly linked to the performance of the mutual fund. While past performance can provide insights, it does not guarantee future returns. It's important to conduct thorough research and choose funds with a consistent track record and strong fundamentals. Regular monitoring of fund performance is also necessary to ensure it aligns with your investment objectives.

Lumpsum Vs SIP in Mutual Funds

Aspects One-Time Investment Systematic Investment Plan (SIP)
Suitable for Investors with significant capital, comfortable with market timing Investors with limited capital, building saving habits, risk-averse
Risk Higher risk due to a single, large investment Lower risk due to averaging and smaller investments
Investment Size Large, lump sum amount Small, fixed amount at regular intervalsr
Market Timing Requires accurate prediction of market lows Reduces risk of volatility by averaging
Rupee Cost Averaging Not applicable, as the entire amount is invested at once Takes advantage of rupee cost averaging by buying more units when prices are low and fewer units when prices are high
Psychological Impact May cause anxiety if the market is highly volatile at the time of investment Reduce psychological impact as investments are automatically spread over time
Liquidity Immediate investment and liquidity Can be relatively less liquid, especially considering a commitment to regular investments
Convenience Requires a somewhat high amount of capital at the beginning Provides flexibility as investors can start with a small amount and increase/decrease over time
Discipline Requires self-control to invest the entire amount Promotes automatic, disciplined investing
Returns Potential Higher potential returns if the market performs well Lower potential returns, but consistent
Other Benefits May offer discounts or bonus units for a lump sum Encourages compound interest and wealth creation


As we see, like any other investment instrument, SIP in Mutual Funds also has its pros and cons. It has the full potential to earn returns equal to or less than stocks and more than gold or real estate.

Assessing your financial goals, risk appetite, and investment horizon is crucial in determining whether SIP is the right investment strategy for you or not. Remember, understanding the pros and cons is key to making informed investment decisions and achieving your financial objectives.

Dhiren Vaghadiya

About author

Dhiren Vaghadiya

Hello! I'm Dhiren, an avid investor who continuously find valuable stocks to invest in. I enjoy delving into stock finances and conducting fundamental research. I'm a self-learner, primarily using YouTube and Google to learn new things. Additionally, I love music, movies, dogs and nature's serenity. Blogging, SEO, investing and spirituality are my favorite subjects.

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