Top 6 Common SIP Myths
Systematic Investment Plan (SIP) is on everyone's lips. The various campaigns done by the mutual fund companies and industry has ushered SIP revolution in the country. According to the data from the industry trade body, Association of Mutual Funds in India (AMFI), Mutual Fund SIP accounts was 3.04 crore and the total amount collected was Rs. 8,532 crore in January 2020. The SIP amount collected in January 2017 was Rs.4,095 crore. This indicates the rising popularity of SIP within a few years.
However, it has a downside. A lot of investors are not clear how SIP functions and spread the wrong information about SIP. SIP investors must dispel these myths and have a clear and correct understanding of SIP.
Here are some of the common misconceptions about SIPs:
Myth 1: Investing In SIP:
If you ask an individual where they have invested, they are likely to say that they have invested in SIPs. This is the most common misconception. SIP is a facility offered to mutual fund investors by the mutual fund houses to invest in a scheme of their choice. One invests through SIP. The other method is one-time lump sum investment.
Myth 2: SIP is only meant for small-ticket investors:
Investors can start investing in mutual funds through SIP with a minimum amount of Rs.500. Individuals can also set up SIPs worth Rs.1 lakh or more. However, funds manager can put an upper limit on SIP amount in specific funds depending on their market outlook and it can change from time to time.
Myth 3: SIP is not risky or it gives guaranteed returns
Many people assume that SIP is a risk-free way to invest in mutual funds and it provides assured returns. However, it is not true. SIP is a facility and the underlying risk depends on the securities/stocks invested by the fund. E.g. if you have invested in a small-cap fund that invests in small-cap companies through SIP, the fund will be riskier than a large cap fund that invests in well established large companies. The risk comes from its underlying securities and not the invested route.
Myth 4: SIP Term and Amount Cannot Be Changed
SIP is extremely flexible and investors can change their SIP amount or duration easily. E.g. you can easily increase your SIP amount after you receive an increment. However, you need to keep in mind that fund houses need a few days to process your request. So, you may not be able to change your ongoing SIP if the request is already in process. But, it can be revised for the next month's SIP.
Myth 5: SIP cannot be stopped
Nowadays most funds have a perpetual SIP. It does away with the process of renewing your SIP every year after the term gets over. Although perpetual SIP is in place, you can still discontinue your SIP if you want to. We suggest that you stop your SIP when you meet your financial goals.
If you are undergoing through tough financial situations, you can also avail the facility to pause your investment for some time. You can restart the SIP as soon as possible. This will help to grow your accumulated assets and restart the SIP without any hassle.
Myth 6: Stopping or redeeming your SIPs when the market is down is a wise move
Rupee cost averaging is the main advantage of SIP. As you invest a certain sum of money every month, the fund houses allot units accordingly. This benefits investors as it helps to take advantage of the ups and downs in the market. You are allotted more units when the market is down and fewer units when the market is up.
So, if you think that stopping SIPs or withdrawing all your units when the market is down is a good move, you are highly mistaken. In reality, staying invested when the market is down can help you to accumulate more units of your funds that can lead to capital appreciation when the market recovers.
If you are planning to invest through SIP or you are already a mutual fund investor, then it is important to have the facts in place. It is time to dump and do away with these SIP myths. To know more about SIP, consult your financial advisor.