Seven common SIP myths busted

A systematic investment plan (SIP) is one of the simplest routes to building wealth. Due to its simplicity, it has been gaining popularity among investors. From April 2021 to March 2022, investors put more than Rs 1.24 lakh crore into mutual funds through SIPs. However, there is a horde of misconceptions surrounding it, leading to many investors making common investment mistakes.

In this article, we do some myth-busting and clear up seven misconceptions concerning SIPs:

Myth #1: Investing in a mutual fund through SIP gives you sure-shot returns

Fact: There is no assurance of returns for SIP investments. If you invest in equity-oriented mutual funds, your money will be employed in stock markets, which carries a degree of risk and volatility. However, over time the irregularities of the markets smoothen out, leading to a net positive return.

In the case of debt mutual funds, your investments are more prone to volatility if kept for a longer duration. This is because the underlying assets for these funds carry with them something called interest rate risk. To know more about it, here's a complete explainer on the topic.

Suggested read: Long-duration funds: High returns, high volatility

Myth #2: You will never lose money through SIP investing

Fact: SIPs might not shield you from losses, and your investment value might even become negative at times, especially when markets decline. This is especially true in the case of equity-oriented mutual funds that invest in stock markets.

Then why do all finance gurus worship SIPs? Well, by investing through an SIP, you get to average out your cost of acquisition over a long time. On the other hand, if you catch a market high and invest a lump sum, you'll lose quite a bit of money when the market falls.

To recap, an SIP can reduce the risk element and guard against sharp market falls. However, they still remain vulnerable to market declines.

Suggested read: SIPs vs lump sum investments: Which is better?

Myth #3: Your SIP amount, date, etc., can't be changed once started

Fact: SIPs give you a lot of flexibility. You can change the investment amount and tenure at any time. You can alter the SIP amount if your income rises or falls or if you wish to invest more. In fact, we recommend you increase your SIP amount when you get a raise.

You can even request the fund house to pause your SIP in any month. Here's a quick primer on this feature offered by various AMCs.

Myth #4: Weekly SIPs are better than monthly SIPs

Fact: By consistently investing in equity, you can average out your investment costs and navigate through the ups and downs of the market better.

But lately, a new concept of smart SIPs has taken this concept to the extreme. Some people claim that increasing the number of SIPs will improve the returns. The logic behind this is that some investors feel that a weekly SIP improves your chances of catching a market low.

All of this is just overkill and makes monitoring your investments a hassle. In fact, the difference in returns between weekly and monthly SIPs isn't too different. So for the effort needed in a weekly SIP, the payoff is minimal.

Myth #5: There is a penalty for missing your mutual fund SIP

Fact: While you should avoid missing your SIP instalment, you can miss them for one or two months. You don't need to pay a penalty; neither does your investment become inactive.

But the banks may charge you for dishonouring auto-debit payments. Also, there is a risk of your SIP investment getting cancelled if you miss out on your investment for three consecutive months. In such a case, you can create a fresh mandate to restart your SIP.

Suggested read: Want to pause your SIP investments?: All you need to know

Myth #6: An SIP is only for equity funds

Fact: Not true as even for non-equity funds, where there is less volatility, taking the SIP route makes sense for a lot of investors. Of course, an SIP makes investing simpler.

However, your money gets deducted from your bank account at a fixed date, compelling you to prepare your finances for the rest of the month. This financial discipline, built by investing through an SIP, can help you build immense wealth in the long run.

Myth #7: Mutual fund SIPs only suit investors with minimal capital

Fact: Many people think that an SIP is only for small investors because it allows you to start investing for as low as Rs 500-Rs 1,000 per month.

However, that is just the minimum amount. Majority of mutual funds do not have a cap on the maximum SIP amount. You can invest as much as you want.

Also read:
SIPs are about simplicity
SIPs are about psychology, not maths

This article was originally published on October 04, 2022, and last updated on August 28, 2024.