Five Myths about SIP Investing

A Systematic Investment Plan is a powerful tool that gives investors an opportunity to make small, fixed systematic investments in mutual funds. All an investor has to do is complete a one time mandate with their bank following which they can start a mutual fund SIP. Every month on a predetermined date, a fixed amount is debited from the investor’s savings account and electronically transferred to the mutual fund. However, one needs to be a KYC compliant individual to make an investment in mutual funds. SIP is the most preferred investment mode as compared to one time lump sum investment.

However, there are several myths that surround SIP. Today we are going to bust those myths

1.   SIP are mutual funds

The term SIP has become so synonymous with mutual funds that a lot of people feel that they are one and the same. However, that is not at all true. SIP is a way to invest in mutual funds. The most traditional way to make an investment in mutual funds is by making a one time lump sum investment. However when you make a lump sum investment, you expose the entire investment amount to dangers of volatile equity markets. But when you start an SIP only a small amount is credited monthly to your mutual fund and only that amount is exposed to market volatility.

2.   SIP guarantees capital appreciation

Now remember that a Systematic Investment Plan is only a way to invest in mutual funds. You pick an amount you are comfortable with and you invest that amount in the fund every month. If the fund that you invested in is doing good, your investments will generate income and your rupee gets appreciated. However, SIP doesn’t play a role in helping your fund performance. The performance of a mutual fund depends on the performance of its underlying assets. Also, investments made in mutual funds do not guarantee returns. Thus, investors should bear in mind that SIPs do not guarantee returns.

3.   SIPs are only ideal for equity mutual funds

Historically, equity funds have shown their true potential only when one remained invested in them for the long run. Which is why it is better to start an SIP in an equity fund. One can continue investing in mutual funds via SIP for seven to ten years and do not feel a pinch in their pocket. However, that does not necessarily mean that one should only consider SIP for equity fund investments. If you do not carry a moderately high risk appetite and want to invest in a debt fund, you can still start an SIP. The purpose of SIP is to inculcate the habit of regular investing. So irrespective of which mutual fund scheme you choose, you can always start a SIP.

4.   SIPs are only for those who can’t afford large investments

In India, SIPs are marketed as a tool for those who cannot afford to make large investments. Investors are offered to make a minimum investment of Rs. 500 in mutual funds via SIP. However, there is a minimum investment amount limit, there is no upper limit to invest in mutual funds via SIP. One can decide an SIP amount depending on their risk appetite and invest as much as they want at systematic intervals.

5.   You cannot change your monthly SIP amount

A lot of investors feel that once they decide a specific amount to invest in mutual funds via SIP, they will have to continue investing that amount till the end. But the fact is that investors have the flexibility of changing the investment amount depending on their investment objective. You can start with a monthly SIP of Rs. 5000 and after a year if the fund is performing well, you can modify the SIP amount and increase it to Rs. 10,000.

Now that the myths surrounding SIP are busted, when are you starting your mutual fund SIP? If you aren’t sure about how much money you need to invest regularly to achieve your financial goals, you can use the SIP calculator which is easily available online.

Kamlesh Bakshi