What is an SIP?
SIP means Systematic Investment Plan. Some amount of money is invested on a regular basis into mutual funds via SIP. SIP can be done daily, weekly or monthly. You can calculate the returns via SIP using SIP Calculator.
What are Common Misconceptions About SIPs?
A misconception is just an excuse for any investor to dodge investing. Don’t fall for these. Look at the bigger picture and start investing to achieve your goals. Below are the 7 most common Misconceptions about SIPs.
Misconception 1: SIP is only for the short term
One of the most common myths about SIP investing. Most investors are ready to invest regular amounts in PPF, insurance policies or for repaying loans. But when it comes to equity investments, investors expect short term investments to give high returns. Most people consider debt for the long term and equity for short term investments, and they are committing the biggest mistake. Why is that? It has a very simple logic that, debt investments generate good returns in favourable or high-interest rate cycles. While equity investments should be held through an entire market cycle i.e. through an upcycle and down market cycle. The very nature of a SIP is to help investors average out their cost by regular disciplined investments.
It is important to understand that returns in the short term for equity SIPs can be negative due to temporary market corrections. This is exactly when SIPs are doing their jobs of trying to average out your costs. By interrupting your SIPs, you are trying to lower your returns. Therefore, make sure you keep your investments for an entire business cycle, which usually lasts between 5-7 years. Also, longer the investment duration, the higher are the chances of earning better returns as SIPs take advantage of market volatility.
Misconception 2: SIP is for small investments
Yes, SIP helps to invest a small amount regularly. But, does that mean it doesn’t accept higher sums or doesn’t work for higher investments? SIP is only an investment vehicle helping investors to invest regular sums automatically. For example, be it a SIP of Rs 1,000 per month or Rs 10,000 per month, SIP investing and rupee cost averaging works the same in both scenarios. If you are a small retail investor or an HNI, with your SIPs investments you are buying through market ups and downs.
SIPs have been many HNIs best friends. Be it small or big sums, many HNIs prefer the SIP route rather than lump sum investments. Irrespective of how much you invest, stay invested for longer to reap benefits of SIPs.
Misconception 3: SIP Tenure and Amount cannot be changed
Usually, investors are under the impression that once, an SIP is started, they do not have the flexibility to alter their investment amount and tenure. However, this is not true. SIP is one of the most flexible investment vehicles. You are free to change your investment amount and tenure as you like. However, the only thing you need to keep in mind before altering is that whether your investments have fulfilled the minimum tenure to avoid exit loads. Also, few funds require a minimum amount and minimum tenure for a SIP plan. Though there are no penalties for this, you are required to complete the documentation for change.
Misconception 4: SIPs guarantee returns
Just like equities, Mutual Funds are also market-linked instruments. Therefore, SIPs in mutual funds do not guarantee any returns. Market linked instruments carry risk. Therefore, SIPs in mutual funds are exposed to risk. However, this risk is much lower when compared to an equity investment. SIP investments give the investor a better chance of capital appreciation. This holds true only when you are invested for longer durations as it offsets market volatilities.
Misconception 5: SIP is not advised in a Bull Market
The biggest advantage of SIPs is that an investor doesn’t need to worry about when to start investing. Be it a bull phase or a bear phase, SIPs do their work when invested for longer durations. Only for lump sum investments, you need to be worried about the bull phase. SIPs in the long term offset the market volatilities and help in rupee cost averaging. Therefore, SIP investments are good to start anytime regardless of the market phase.
Misconception 6: SIP cannot be discontinued
As of 2022, there are 2.74 crore SIP accounts in India, contributing around Rs 8,122 crore to the mutual fund industry. This number is only increasing month by month. Isn’t this enough to talk about the popularity of mutual funds? Staying invested in a fund for the long term is the key to earn higher returns. However, this doesn’t mean that you forget about it after investing. Regularly revisiting your investments and reviewing their performance is necessary. Therefore, if you need to make a decision based on the fund’s performance. If a fund isn’t performing well, then consider a different fund.
If you wish to discontinue a SIP, you are free to do so. There aren’t any additional charges that are levied on an investor. You can either discontinue your SIPs and continue to stay invested in the fund or discontinue and withdraw the amount invested as a lump sum or through STPs. Moving investments to different funds is always an option. Therefore, do not think that once invested you are stuck with it for life.
Misconception 7: I can time the market better
Oh yes, it’s possible. But how many times? Do you have a 100% success rate? Are you 100% accurate with your timing? These are the most common questions raised when anyone says that they are good at timing the market. Even the most successful and experienced investors are not accurate always. There are multiple unknown factors that have an impact on the market and our investments. It’s not just difficult but also next to impossible for a common investor to time the market. Be it in terms of time or knowledge required to understand the market.
Here’s when Mutual Fund SIPs earn their importance. With SIPs, an investor is able to overcome the fear to time the market and is able to invest for the long term by averaging out the price risk. Hence, SIPs are good alternatives for a common investor who wants to invest but always fears about the market phases.
Mutual Fund Financial Advisor
For a common investor, the right financial advisor is a blessing in disguise. Talk to a financial advisor who’ll be able to help you in fund selection by analyzing your financial position. This is very important because, unless your investment objectives, goals and investments are in sync not even the best fund in the world can help you earn what you desire.