An SIP is the most common term you hear when it comes to mutual funds. However, it is also not oblivious of some rampant misbeliefs. Here we bust the most prominent ones.
Updated on: 29-Nov-2022 •Ravi Banagere
A systematic investment plan (SIP) is one of the most accessible investment options for investors. It is gaining popularity every year, with investors putting more than Rs 1.24 lakh crore through SIPs between April 2021 and March 2022. However, like with all things popular, there are also a lot of misconceptions that surround it.
Here are the seven most widespread misconceptions concerning mutual fund SIP investments:
Myth #1: SIPs offer guaranteed 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 carry a degree of risk and volatility.
In case of debt funds, your SIP investments have greater predictability if you allow your investment to mature. However, exiting a debt fund investment prematurely can expose you to interest rate swings (in simpler words, unpredictability in returns).
Myth #2: SIPs never incur a loss
Fact: SIPs might not shield you from losses, and your investment value might even become negative at times, especially when markets decline. This is true in case of equity-oriented mutual funds that invest in stock markets.
Then why do all finance experts worship SIPs? It is because SIPs let you invest over time which averages out your cost of purchase. As a result, the impact of a market decline would be less severe.
To recap, an SIP can reduce the risk element and guard against sharp market falls. However, they still remain vulnerable to market declines.
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. You can even request the fund house to stop your SIPs. Switching mutual funds is also an option for you.
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, and they think going for SIPs on a fortnightly, weekly, or even daily basis is better than a boring monthly option.
All of this is just overkill and introduces unnecessary complications when managing or monitoring your investments. Increasing your SIP frequency does not materially affect your returns, but it does result in more operational hassle on your part. The easiest approach to take advantage of market swings while still managing the paperwork is through a monthly SIP.
Myth #5: Penalty for missing SIP instalments
Fact: While it is avoidable, you can miss an SIP instalment by one or two months. You don't need to pay a penalty; neither does your investment become inactive. But please be aware that banks may charge you for dishonouring auto-debit payments.
However, 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 will have to lodge a fresh mandate to restart your SIP.
Myth #6: An SIP is only for equity funds
Fact: Not true as even for non-equity funds, where there is not much fear of volatility, taking the SIP route makes sense for a lot of investors.
It helps you avoid splurging your money on needless materialistic things and also imbibes in you a disciplined approach to saving money and investing.
Myth #7: SIPs only suit small investors
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, which clearly suggests that SIP is for all investors, large and small.