There is no denying the fact that SIPs are gaining popularity, with many investors taking to them. That's good news certainly as SIPs optimise your investment returns. But rising popularity of anything also results in many misconceptions about it. Because many investors have learnt about SIPs from others, they may have not taken the time to appreciate their true nature. What's more, when such investors go ahead and 'counsel' others about the need for SIPs, these misconceptions, or myths, get reinforced. Here we discuss four popular myths that people have nurtured about SIPs and what the truth is.
Investing 'in' SIPs: If you ask a novice SIP investor about where he is investing, an interesting answer comes: 'I am investing in SIPs'. Well, if you ask which fund it is, the investor has little idea. If he does remember something, it's not the name or the category of the fund but the name of the AMC.
Remember that you don't invest 'in' an SIP. You invest 'through' an SIP in an equity fund. SIPs are not investments themselves; they are a method. Eventually, your returns will be guided not just by SIPs but by the underlying fund.
Hence, while it's good that you have taken the SIP route, it's equally crucial that you select a good equity fund.
The more frequent the SIP, the better it is: Systematically investing your money in equity helps you average out your investment cost and thus helps you take advantage of the market's ups and downs. But some investors take this too far. They think that increasing the frequency of SIPs helps you get better returns. So, if you do fortnightly, weekly or even daily SIPs, then that's better than a monthly SIP.
Research has repeatedly proved that increasing the frequency of SIPs has no material impact on returns but it does increase the operational hassle on your part. A monthly SIP is the best way to benefit from market fluctuations while also keeping the paperwork in check.
Complex SIPs are better than a simple SIP: Today many variants of SIPs are available. They allow you to vary your investment as per some determinant. For instance, one type of SIP allows you to reduce your investment amount in a rising market and increase it in a falling market, thus helping you invest more when the stocks are cheaper. Many investors find such complex SIP ideas appealing.
In theory, complex SIP methods do look promising. In practice, however, they may cause many hassles which are not easily foreseen.
For instance, the SIP described above can result in a lower accumulated corpus should the markets rally and greater financial strain should the markets decline for a prolonged period.
Sometime back we carried an article that explored this theme in detail. Our research suggests that the SIPs in their simple, original form are the best way, both in terms of returns and ease of doing. Hence, don't try to complicate your SIPs. Stick with simplicity.
Stopping your SIPs in a bear phase helps: Some investors, out of fear or in order to act smart, discontinue their SIPs in a bear phase. Why lose your money? They say. When markets jump, they start investing again.
Timing your SIPs, i.e., starting or stopping them as per the market phase looks intuitive, yet it's counterproductive. First, when you stop your SIPs during a bear phase, you lose the opportunity to average out your buying price lower. Second, when you try to time the market, you are often left out and thus incur an opportunity cost if the market suddenly starts racing.
By their very design, SIPs are meant to discourage this investor behaviour. By making you invest through all market phases, SIPs keep both fear and greed in check. If you are investing through SIPs, what matters most is discipline, not timing.