Common myths about SIP investments

  • A systematic investment plan or an SIP is a disciplined way of investing, in which an investor can make equal payments at regular intervals over a period to accumulate wealth over the long run. An SIP is considered among the most effective ways of investing for retail investors. It does inculcate the discipline of saving and building wealth in the long run. In India, mutual funds continue to be one of the most significant investment choices amongst investors.
  • As we become aware of the advantages of SIPs, there are a number of myths that have been around the same. Some wonder if SIPs are safe, if they are tax-free and if SIP pays an interest. To become more financially aware, it is crucial for investors to clear their doubt about the myths surrounding SIPs and decide their investment journey.
  • Here are seven common myths about investing via SIPs in mutual funds.

Myth 1: SIP is Only For Small Investors
 
Even though SIPs provide an option to invest in smaller amounts, it should never be assumed that only large amounts are needed to invest via SIPs. With the SIP method of investments, investors can invest as much as they prefer. It is true that many high net worth individuals (HNIs) and wealthy investors invest in the markets via the SIP route. All it requires is one to get the KYC done and they can invest through SIPs.
SIPs enable an investor to invest in the market on a regular basis. Every individual is eligible for this method in order to save for their long-term financial goals. Therefore, it is wrong to consider that SIPs are only valid for small investors.

Myth 2: SIP Can Be Done Only For Equity Funds
 
A common myth amongst investors is that they can invest only in equity funds via the SIP mode of investing. This is not true at all. While investing in mutual funds via SIP, investors can choose from a plethora of available options ranging from debt funds, hybrid funds, funds of funds, index funds, thematic funds, among others.

Myth 3: SIP is a Product
SIP investment is a facility that allows investors to invest periodically at regular intervals. Investors can choose from a portfolio of available mutual fund schemes and the investment amount gets deducted and invested in the scheme. The individual can choose from varying schemes as per their financial objectives and risk appetite.
In the case of SIPs, say an investor wants to invest INR 24,000 spread across a period of 12 months, investors get the flexibility to purchase mutual fund units by investing INR 2,000 every month. SIP is not a product but a type of investment option.
 
Myth 4: SIP Can’t Be Modified Once Selected
 
Many investors are wary of the fact that once an SIP is initiated, it cannot be altered – this is not true. SIPs are considered among the best ways of investing in the capital markets that provide flexibility in the mode of investing.
It is important to understand that once an investor finalizes their SIPs, the amount, period and even the mutual fund scheme can be altered. Investors have the freedom to change the investment amount and the tenure as per their requirements. Investors can change the amount of the SIP if their income increases or decreases and if they plan to save or invest more.

Myth 5: SIP in Low NAV Funds Will Offer Higher Returns

Many investors believe that mutual funds with lower net asset value (NAV) are cheaper and hence would yield higher returns. Even though the NAV plays an important role while investing, it does not signify the return that the mutual fund scheme can offer.
The NAV of a fund is the value at which an investor purchases or sells mutual funds units. The NAV of a fund changes regularly. The cost of mutual funds (NAV) does not determine the returns.
For example: If someone wants to invest INR 10,000 and has two options: One fund has NAV of INR 100 and the other fund has NAV of INR 1,000. With a lower NAV fund, a person can buy 100 units and with higher one, a person can buy 10 units, but in either case, the sum invested is INR 10,000, the value of investment being identical. Hence, investors should focus more on the actual performance of the fund rather than just the NAV.

Myth 6: SIP is Subject to Guaranteed Returns

SIPs grants the investors the ability to invest in the mutual funds periodically. Investing through SIPs in the mutual funds is safer compared to the equity markets yet mutual funds are subject to market risks depending on market volatility.
In the short run, it is difficult to attain guaranteed returns for an investor while being invested in mutual funds for the long term helps yield capital appreciation. Thus, investors should be clear that investing in the market carries some degree of risk and thus one needs to be prepared before investing. Investing in mutual funds through SIPs gives the investor the benefit of rupee cost averaging (RCA).

Myth 7: Don’t Invest Through SIP in a Bullish Market

Investors need to see-through the level of discipline, patience and research required while investing in mutual funds. Most SIPs yield results over the longer term. It is not practically possible to time the markets in real-time. Buying at dips and selling at highs is theoretically possible but is not feasible when it comes to practical decisions.
In the longer time frame, SIP investments usually deliver higher yields. It is crucial to understand that bullish and bearish phases require consideration in case you are investing through the lump sum method.
As investors invest through SIPs, the rupee cost averaging eradicates the impact on portfolio with the passage of time. SIPs negate the impact of market volatility on your portfolio. Thus, investing in mutual funds through SIPs doesn’t require investors to wait for the right time. It is important for people to understand the importance of early investing and reap the benefits of compounding.

Bottom Line

If you are looking to start your investment journey via SIP, make sure you look for a long-term perspective. Considering SIP investing is all about discipline, a sound approach coupled with patience can lead to wealth creation over a period of time.
Additionally, investors should also keep in mind the historical data of mutual fund performance. There is no right time to start your investment in mutual funds. The sooner you start your investment journey, the better returns you can expect to yield in the future.
  

Source: Forbes

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Garvit Chaharia is the Founder of Deeva Ventures & has helped more than 10,000 investors manage their biggest stress - Money; by providing disciplined advisory on Portfolio Management, Risk Management & Debt Management.