There is a new excitement among the investors in India with the capital markets reaching historic highs and the mutual fund inflows recording new growth level, giving an opportunity for investors from all walks of life to participate in it. Presently, there are two modes of investments: Lump sum investments and Systematic Investment Plan (SIP), and each mode have a specific set of advantages and disadvantages.
SIP is considered as the simplest, organized and convenient way of investment. However, there are many people who are still skeptical of the SIP because of the various myths surrounding this investment style. In this article, we bust common myths of SIP and reveal truths that every investor must be aware of.
Myth 1: SIP suits only the small investors
What’s the fact: There is a common perception especially among the new investors that a SIP investment amount can only be in small amounts of Rs.500, Rs.1000 or similar small amounts. Investors should know that there no such limit on the amount when investing through SIPs. There can be investments as much as Rs.1 lakh every month or even more through SIPs. By investing systematically through SIPs, investors are able to invest in a disciplined manner and create wealth over a long period of time.
One of the main objectives of SIPs is to inculcate the habit of long-term and disciplined investments among investors as it doesn’t matter whether you choose to invest Rs. 500 or Rs.10,000 per month, the benefit of rupee cost averaging will work equally for all the investors in SIPs. SIP is not only for small retail investors, but even high net worth individuals have reposed confidence in this method and invest diligently via SIPs.
Myth 2: SIP is not a good option during bullish markets
What’s the fact: When the markets are witnessing a bull run, people often hesitate to firmly invest via SIP. Many people who have already invested via SIP may withdraw from the plan during such times since they don’t want to purchase units at higher values. But people often forget that the key benefit of SIP lies in the fact that every investor benefits from rupee cost averaging that balances out different market conditions over the long term. The rupee cost averaging works even better when an investor stays invested for longer duration. This is one reason why an investor shouldn’t worry about the market conditions when investing through SIP and instead focus on long term investment while entering the market.
Investors should understand that the whole point of investing through SIP is to do away with the market timing. A SIP can be started any time as long as you’re committed to stick to it throughout its tenure.
Myth 3: There is guaranteed returns in SIP investments
What’s the fact: We invest in SIPs a specified amount of money at select intervals like, weekly, fortnightly or monthly in a specific mutual fund scheme over a predetermined period of time. Since the mutual funds provide market linked investment options, there is no guarantee on the scheme returns. This is true for investments made through SIPs, which contrary to popular belief, do not guarantee returns. However, if you are investing regularly and staying invested for long term through SIPs, it gives you a better chance of capital appreciation.
Myth 4: Tenure and amount in SIP cannot be changed
What’s the fact: There is a common belief that once committed to a SIP of specific duration and amount, there is no way to change it without paying a penalty. In reality, there is no truth in this. Investors get a flexible way to make an investment through SIPs and at any point during the investment tenure; investors can change the SIP investment amount or tenure as per their requirement. However, there is a minimum SIP investment amount and a minimum specified tenure (which is generally 6 months) which investors should keep in mind when modifying their current SIP instructions. Investors should fill out a form and submit to the AMC to make the necessary changes. The fund house can take around a month to approve the same and there is no penalty for such changes.
Myth 5: Lump Sum Mutual Funds are better performers than SIPs
What’s the fact: Normally, people are advised to invest when prices are low and redeem for a profit when prices are higher with regards to any market linked investments. The same is true for equity shares. SIPs are better placed than lump sum investments since they don’t require the need to “time” markets. However, people who successfully time markets are definitely better placed to make higher profits as compared to a SIP investor, but that is very rare. As an investor, SIP provides you the benefit of rupee cost averaging and helps you to stay invested for longer time.
Myth 6: Investors can outdo the SIPs by being smart and timing the markets better
What’s the fact: This may be true in some cases but definitely not every time an investor will be able to pull it off. There are so many extraneous factors involved that even the seasoned investment gurus are not able to time the market mostly.
Investors should know that the markets are prone to fluctuations owing to several unknown and known factors and exhibit great volatility. Therefore, it is only the amount of time you stay invested matters the most and not timing the market.
Myth 7: SIPs are only meant for short duration
What’s the fact: One of the most commonly noted myth about SIP investments, especially about equity mutual fund SIPs is that it is for the short duration. People who are quite comfortable committing regular sums of money to PPF, insurance, home loan repayments, become skeptical when it comes to equity mutual fund investing through SIPs. The fact is that equity mutual fund investments are for the long term only. For short term, there various kind of debt funds suiting your different investment needs.
One can’t argue that the popularity of SIP among new market entrants is a myth, and with markets at around historic highs, people should have the confidence to continue their current SIP investments and link the SIP investments to their long term financial goals. However, investors should also periodically check the performance of their current SIP investments to ensure that they are aligned with their long term goals. Investors can consider discontinuing their current SIP investment and invest in a different fund only if the performance of a fund is not up to the mark.
Smart investors should simply run an SIP and then let it take care of their investments on an auto-pilot mode. There are many benefits that mutual fund SIPs offer the investors like low investment amount, diversification benefits and professional management etc. Why wait, then? Start investing in SIPs as soon as possible!