First, if saving is an arduous task for you, then SIP can do this for you. Money deducted from your account (through post-dated cheques) and invested is money you cannot spend. And a rupee saved is a rupee earned. Even if each investment is small, over time this can add up to a neat kitty. And the power of compounding can do wonders. In due course of time, a small amount can grow into a significant amount. More importantly, an SIP does away with the need or effort to time the market. When the market is falling you may feel that it may decline further and that you should wait a while. Often stock markets make a recovery before you notice and the opportunity is lost. When markets are rising it is scary to invest money. Isn't it better that you wait for a correction and then make an investment? But if the correction doesn't come about, then even this opportunity is missed. And if markets are going nowhere, then what is the point in investing at all?
So, trying to find out which is the best time to invest can be a tough task. And that's why it is said that timing the market is futile. If one could take advantage of the ups and downs that markets encounter, it would be great. And this is where SIP fits in. By the process of regular investing one gets to invest in the highs as well as the lows, and this helps in averaging out the volatility in the market.
Some mutual funds suggest that contribution to an SIP programme should be increased in a full-fledged bear market. While this may be emotionally difficult, it can be rewarding when markets recover. But then this appears very much like timing the market and the purpose of an SIP is to avoid this effort.
Thus, an SIP imparts discipline to investing. Whether it is the regular act of saving or investing, an SIP does both automatically. While there are certain benefits of an SIP please remember it is no wonder drug that cures all investment-related ailments.
An SIP does not guarantee returns or positive returns. If you opt for an SIP in a falling market and the market continues to fall, then your investments will suffer a loss on the whole. An SIP does not guarantee a better return than a one-time investment. If you made a one-time investment when the Sensex was at 2,834 points in October 2002, then this would have performed better as compared to carrying out an SIP by spreading the investment over a period of time.
The emphasis on averaging out in an SIP obviously makes it most useful in case of an equity fund, as the volatility is greater here. An SIP can be useful for a debt fund as well...to help build a pool of savings. It can be thought of something akin to a recurring deposit where a part of your savings is automatically deducted from your account.
Overall, an SIP is a simple device that helps you to save and invest in a disciplined manner without having to time the market.
Source : ET