How many times have you seen advertisements asking you to invest in mutual funds through SIPs? While you may be attracted by the prospect of investing in mutual funds are you still sceptical of the Systematic Investment Plan (SIP)? Paisabazaar wants to bust some of these myths that surround SIPs for a new investor.
Myth 1: SIP is Suitable only for Small Investors
The Truth: It is common to think that the SIP mode should be used to invest with smaller amounts such as Rs. 500 or Rs.1000. However, you can invest as much as Rs 1 lakh (or more) through the SIP mode. All you need is to complete your KYC.
Benefit: One of the key benefits to investing through SIPs is that savings can systematically match the returns. You could end up reaping benefits of a large amount from your investments at a later date.
Myth 2: SIP is not Recommended During Bullish Market Conditions
The Truth: If you have been advised to not invest through SIPs when the markets are witnessing a bull run i.e. an upward trend, it is only true if you are timing the market to invest through the lumpsum mode (and are required to time the market) and not for SIPs. Over the long term, rupee costs are averaged out offsetting market conditions for your SIP investments.
Benefit: Rupee cost averaging works best when you stay invested for longer periods. Thus, when investing through SIP it is best to ignore current market conditions and focus on investing for the long term, regardless of when you enter the market.
Myth 3: SIP Tenure and Amount Cannot be Changed Once Started
The Truth: Although investors may believe that the duration and amount committed once cannot be altered, a SIP plan is one of the most flexible ways to invest. You are free to change the investment amount or tenure if required.
Benefit: You should, however, keep in mind that some funds may require a minimum amount and tenure for your SIP plan. You may be required to fill out key documentation for changes, but no penalties are charged.
Myth 4: SIPs Perform Better Than Lump Sum Investments
The Truth: If you invest through lumpsum in mutual funds you will have to get into the habit of investing when prices are low and redeem when prices for units are higher. However, amateur, and even sometimes seasoned, investors could slip when timing markets. Nonetheless, if you are successful at timing markets, you could gain higher from investing through a lumpsum rather than a SIP.
Benefit: To be able to time markets and earn sizeable returns, investing your time is also needed. Thus if you are short on time and are unable to put in the effort or you are a new investor (i.e. lack strong understanding of capital markets), a SIP is the ideal mode for mutual fund investment. Its systematic nature and rupee cost averaging can benefit you in the long term.
Myth 5: SIP in a Mutual Fund Guarantees Returns
The Truth: The nature of a SIP plan is investing a specified amount in a certain mutual fund periodically (monthly/weekly). Since these are market-linked instruments, the returns from these investment options are not guaranteed, unfortunately.
Benefit: Thus contrary to popular belief, mutual fund investments, even if made through a SIP, do not guarantee returns. That said investing through a SIP does give you a better chance of capital appreciation if you stay invested for a longer term as they offset market volatilities.
Myth 6: SIP cannot be Discontinued
The Truth: Popularity of the SIP mode for mutual fund has been increasing in popularity, markets are also breaking records. Hence staying invested is the way to go. But do not get complacent, check the performance of your SIP periodically. If the performance is lacklustre, you can consider investing in a different fund.
Benefit: If you choose to discontinue a SIP in a poorly performing fund, the fund house does not levy charges. Moreover, you could stop your periodical SIP amount but continue to stay invested (without redemption). Moving your assets to a different fund is always an option.