Common Myths about investing in SIP

Common Myths about investing in SIP

Is there something that is stopping you from investing? It is possibly a myth, and myths are the biggest excuses for investors to dodge investing. Here are a few myth busters on the Systematic Investment Plan (SIP) if you too fall for myths.

One of the biggest myths about SIP is they offer guaranteed results which are not true. SIPs are similar to other market instruments and carry risk. However, the risk is lower, making it one of the safe options, but they cannot guarantee results, especially in shorter durations. SIPs in mutual funds are exposed to risk and market fluctuations when they are for a shorter duration. On the other hand, SIP benefits capital appreciation when the investment is for a longer duration.

Many investors, institutions, or people suggest do not invest in SIP when the market is in the bull run. A bull run is when the market is showing an upward trend and growing continuously, and in such a case, the mutual funds will buy less as the prices are high. However, the myth is not true, and the reason is simple, SIP is a long-term process, and the market won't stay the same for a long time; it fluctuates or, in other terms, is volatile. In the long run, the recent market changes won't affect a high margin.

Systematic Investment Plan (SIP) is only for small investments, which is a completely wrong statement. SIP is a mode of investment and is not limited to small investments. SIP can be used to invest as low as Rs.500 or anything bigger than that. SIP works on the rupee cost averaging, which allows the investors to invest any amount. For example, an investor can invest either Rs.500 or Rs.10000 depending on the convenience and investment scheme.

Most of the investors who use SIP to invest are under the impression that the tenure and amount cannot be altered. This builds pressure on the investor, which shouldn't be existing in the first place. The reason is SIP is the most flexible investment mode. An investor can alter the tenure period, and the amount as per the wish provided a few conditions. For instance, the tenure period should not be reduced anywhere near the minimum tenure period to avoid penalties or exit loads. In addition, a few funds require a minimum tenure and amount for a SIP plan depending upon the scheme. This can be found in the terms and conditions when working on the documentation. Besides, changing the SIP tenure and amount is not a hectic process; only the documentation work is to be done.

There are many misconceptions about SIP being limited to Equity Funds as they are volatile to market. However, this is not true as SIP can also be beneficial to debt funds. Investing in debt funds using SIP opens a recurring deposit (RD) with the banks but also gives better and potential returns, which would be hard with the equity funds. Depending on the risk-taking ability and return expectations, one can invest in funds like gilt funds, duration funds, credit risk funds, debt funds, or several other schemes that SEBI allows mutual funds.

When one is starting an investment career and comes across the word SIP, the common misconception is how much return will SIP yield or the best SIP? The misunderstanding here is that SIP is not an investment product; it is the investment mode that an investor can invest in an installment format.

When investors choose funds, most of the investors' common understanding is equity funds are for the short term. This is the biggest mistake when investors consider paying for PPF, insurance policies, or any regular investments and not considering equity funds. The reason is a lot of people consider debt for the long-term as it yields more returns than mutual funds or equity funds. In support of which equity funds are considered for short-term investments.

The truth is equity funds are to be kept for long-terms as they travel the entire market cycle and minor market changes do not affect them. Instead, SIP adjusts the investments, such as buying more when the price is low and buying less when the investment is high. The fundamental of SIP is to average out the cost by regular and disciplined investments in the shorter and longer run.

Final Words

Several myths around SIP might stop an investor from investing, but after reading the above myth busters, it must be easy to distinguish and make a decision.

  • Is SIP safe for investment?
  • SIP is one of the safest investment methods in mutual funds, and investing the lump sum amount instead of SIP may lead to paying higher based on market conditions. It depends but comparing with all the investment schemes, SIP is one of the high-returning and low-risk investments.

  • Is SIP better than FD?
  • Yes, SIP is better than FD because of flexibility, tax benefits, advantages of diversification, and higher returns.

  • Is SIP tax-free?
  • SIP such as equity and balanced mutual funds are considered in the long-term and have tax benefits. However, SIP in the short-term such as debt funds or hybrid funds, is 20% taxable after the indexation.

  • How is SIP beneficial to investors?
  • A Systematic Investment Plan (SIP) gives flexibility, long-term gains, regular saving, convenience, and investment starting as low as Rs.500/Month.

  • Can I lose money in SIP?
  • SIP's have low risk, but there is a chance of losing certain money in some cases.