SIP in Nepal is trending among investors as different influencers are able to convince citizens they can make crores of rupees with just a mare investment of Rs 2000 – 5000 per month.
A systematic Investment Plan is for those looking at the long term with a proper investment strategy, research, and goal in mind.
Theoretically, it is possible to earn crores through SIP but what about practically? so, in this blog post, we will look at the Pros and Cons of SIP in Nepal.
What is Goal Achievement in SIP?
Many long-term financial goals, such as retirement planning or funding a child’s education, require a significant corpus. Longer SIP duration provides more time to accumulate the required amount.
I personally invest in SIP for Diversification, Flexibility, Low Entry Point, and Long-Term Growth Potential, and mainly as a side investment even if your other investments do not work out as expected.
Pros or Advantages of SIP in Nepal
Power of Compounding: This has to be on the top of the list. SIP allows investors to benefit from the power of compounding.
The returns generated on the invested amount are reinvested using Dividend Reinvestment Plan, also known as DREPs it is available on all the SIP providers of Nepal, leading to potential exponential growth over time.
NIBL Sahabhagita Fund has a total average return of more than 17% which is better than the FD rates in Nepal.
Disciplined Investing: SIPs promote regular and disciplined investing, as investors commit to investing a fixed amount at regular intervals. This helps inculcate a habit of saving and investing regularly.
Cost Averaging: As this is a long-term investment, investors can buy more units when the market is down and fewer units when the market is up.
This averaging effect helps reduce the impact of market volatility on the overall investment.
Convenient and Flexible: SIPs are easy to set up and manage. Investors can choose the investment amount and frequency and can also increase or decrease the investment amount based on their financial goals and cash flow.
Almost all 7 SIPs in Nepal offer easy registration and selling of mutual funds.
Diversification: SIPs provide exposure to a diversified portfolio of securities, especially in the case of mutual funds. This diversification helps reduce risk by spreading investments across different assets.
Automatic Investments: SIP payments in other countries are automated, and the investment amount is automatically deducted from the investor’s bank account. But for now, Nepalese need to purchase or pay themselves monthly by logging in to their account.
Low Initial Investment: Many SIPs have a low minimum investment requirement, making them accessible to small investors.
Open Ended funds in Nepal offer a minimum of Rs.1000 as an investment for an interval of monthly, quarterly, semi-annually, and annually.
Cons of SIP
Market Risk: No surprise here; SIPs are subject to market risk, especially equity SIPs. The value of the fund can fluctuate based on market conditions, potentially leading to losses.
No Guarantee of Returns: SIPs don’t guarantee returns or capital protection. The returns are dependent on how the fund managers use the allocated funds.
Most of the Open-Ended Mutual Funds in Nepal are yet to give dividends to their investors.
Short-Term Volatility: While SIPs can mitigate the impact of short-term volatility, they don’t entirely eliminate it. Market fluctuations can still affect the portfolio’s value, especially in the short term.
Liquidity Concerns: Some mutual funds may have a lock-in period, limiting the investor’s liquidity for a specific duration.
All SIPs in Nepal have exit load fees, meaning if you sell before the lock-in period, you have to pay a certain percentage to the fund manager.
Fees and Expenses: Mutual funds and other investment vehicles may have management fees and other expenses, which can impact the overall returns.
Emotional Investing: SIPs can test an investor’s discipline during market downturns. Emotional reactions to market fluctuations may lead to irrational decisions, such as stopping or redeeming SIPs at the wrong time.
NIBLSF gave a 50% dividend on their 2nd year, is now down to 4% in this 2023 bear market as they were not able to generate enough profit.
On the other hand, NMB Saral Bachat E-Fund is yet to provide dividends to its investors.
Market Timing Risk: SIPs involve investing a fixed amount at regular intervals, regardless of market conditions. While this helps in rupee cost averaging, it may not take advantage of significant market opportunities that could arise during a lump-sum investment.
SIP is subject to market risk, and please do your research before starting your investment.