Systematic Investment Plan or SIP is a method of investing money in mutual funds. The other way to invest money in mutual funds is by way of lump-sum investment or simply put one-time payment.
SIP is a systematic way of investing your money in mutual funds. An investor, upon his discretion and convenience, can invest every month or quarter or year. The periodicity of payments shall depend on the chosen plan.
Many times retail investors / average investors do not have large amounts of money to invest at one go. Herein SIP comes to the rescue as a viable method to enable investors to invest small amounts regularly.
When an investor starts a SIP with any mutual fund of his/ her choice, his/ her account is debited by a fixed amount every month. This amount is invested in a mutual fund of your choice. Over a period of time, your investments accumulate and keep growing.
SIP enables disciplined investing as the investment takes place periodically (usually monthly). Moreover, this disciplined investing leads to benefits from rupee cost averaging by investing in prices both high and low.
Furthermore, the convenience in investing an amount as low as ₹500 per month has provided millions of people throughout the country and the world, an opportunity to participate in this investment process.
Read more about SIP here.
With the number of SIP accounts in India touching an astounding figure of 2.11 crores, SIP has definitely become a hot potato, as regards investing in mutual funds is concerned.
Monthly inflows in FY 2017-18 averaged about approximately ₹5000 crore, up from about ₹4000 crore monthly in FY 2016-17.
With this huge surge in SIP investment, comes a lot of myths and hearsay.
In this article, we debunk the top Systematic Investment Plan (SIP) myths that one should be aware of before deciding to be a part of the SIP investor population.
In this article
- Top Myths about SIPs
- Myth #1: SIPs are for small investors only
- Myth #2: SIP installment default attracts heavy penalty
- Myth #3: SIP means guaranteed returns
- Myth #4: Markets are highly valued, so it’s not the right time to start an SIP
- Myth #4: In a tax- saver SIP fund, the entire money can be withdrawn after 3 years
- Myth #6: Lump-sum investment is not possible in an ongoing SIP scheme
- Myth #7: SIP mutual funds are different from lump-sum mutual funds
- Myth #8: Periodic investment in stock is better
- Myth #9: Investment in a SIP is only meant for long-term
- Myth #10: SIP duration cannot be changed
- Myth #11: SIP in any mutual fund scheme will lead to successful investment
Top Myths about SIPs
Myth #1: SIPs are for small investors only
Some investors/ prospective investors might think that SIPs are only for small investors. Or those with access to large funds should not invest in SIPs.
SIP stands for Systematic Investment Plan and creates a systematic investment environment.
It also instills in an investor the habit of regular investments. By allowing small periodic investments, as low as ₹500 per month, in funds of one’s choice, small investors can participate in the investment process.
Notwithstanding the abovementioned facts, there is no limit (usually) to the maximum amount that can be invested in a SIP periodically (unless otherwise mentioned by the respective fund house).
Therefore, while small investors can invest as low as ₹500 per month, high net worth individuals can invest lacs of rupees in SIP schemes every month.
There is a minimum limit to the amount of SIP, but usually, no maximum limit.
Myth #2: SIP installment default attracts heavy penalty
Many investors wrongly believe that if they miss one or more SIP installments then they would have to pay heavy fines and/or penalties.
However, in reality, there is no fine or penalty if an investor misses or defaults on one or more SIP installments.
The Asset Management Companies or AMCs shall not impose any fine, penalty or any charge for that manner on account default of installments.
How this works is that, say an investor has invested in a SIP of ₹1000 per month. The NAV of the fund is ₹100 this month. Therefore, 10 units of the fund (₹1000 / ₹100) shall be purchased each month.
Now if an investor is not able to pay the next month’s SIP installment, then he would not be able to purchase those 10 units of the fund (for the defaulting month).
That is all the harm the investor could have to bear. There shall be no additional costs incurring to the investor on account of default on installments for one or more months.
Myth #3: SIP means guaranteed returns
Some investors might believe that investment via the SIP method eliminates risks and will prevent loss of one’s capital. SIP should not be mistaken for guaranteed returns.
Investment via SIP will surely help an investor gain the benefit of rupee cost averaging by investing at high and low prices, thereby averaging out the costs. Moreover, it will also help reduce the risks to a certain extent.
However, it will not completely eliminate the risks of a loss. If an investor invests at a point in time when the prices and valuations are high and post investing the market falls or crashes (such as post-February 2018) then capital will be lost even on an SIP investment.
Certainly, the magnitude or the extent of loss will be lower in an SIP as compared to a lump-sum investment.
Myth #4: Markets are highly valued, so it’s not the right time to start an SIP
On the contrary to this common public misconception, if the markets are high then it is an opportune time to start the SIP.
The reason for the above statement is that, when the market corrects, the investor shall be able to accumulate more units of the fund at the same SIP installment.
With every fall in the NAV of the fund, the number of units accumulated by the investor shall keep on increasing. Therefore the average purchase cost for the investor shall decrease.
Consequentially, when the valuations become fair and the market is correctly valued (which they eventually have so far), the gains for the investor shall be higher. This is owing to increased units accumulated at a lower average cost.
Myth #4: In a tax- saver SIP fund, the entire money can be withdrawn after 3 years
Equity Linked Savings Scheme or ELSS is a type of mutual fund wherein a major portion out of the total fund is invested in equity and related products. As evident from the name of the scheme, it comes with benefits attached to it, in the form of tax savings.
In case of an SIP in an ELSS fund, there is a common misconception in the minds of common investors that the entire amount invested in the fund can be withdrawn after the completion of the lock-in period of 3 years.
However, it is important to understand that the mandatory lock-in period of 3 years is applicable from the date of investment of a particular SIP installment and not from the date of the start of the SIP in that particular ELSS fund itself.
Example – Suppose one decides to invest ₹5000 per month starting in April 2018 in an ELSS mutual fund. The investor will be able to sell the units of mutual fund on or after April 2021. The units bought in May 2018 can be sold on or after May 2021 only.
For simplification, each SIP installment could be treated as an individual investment. Each separate installment (or investment) shall have a separate lock-in period of 3 years. Similarly, the calculation for 3 years can be done from the date of each SIP installment.
Myth #6: Lump-sum investment is not possible in an ongoing SIP scheme
There is no restriction on any lump-sum investment in a scheme wherein an SIP is currently ongoing. SIP is merely a mode of investing money in a mutual fund scheme.
Let’s say, an investor has a monthly SIP of ₹5000 in a particular mutual fund scheme. Now if he suddenly has a surplus of ₹25000 which he wants to invest in that very mutual fund scheme.
The investor can easily invest ₹25,000 in lump-sum in that scheme and it shall have no effect on the SIP.
Myth #7: SIP mutual funds are different from lump-sum mutual funds
This is a common myth among mutual fund investors. There is no difference between SIP mutual funds and lump-sum mutual funds whatsoever.
To make this crystal clear, it is imperative to understand that SIP and lump-sum are mere modes of investment in a mutual fund. One encourages investment periodically (usually monthly) while the other encourages investment at one-go.
Each has it’ sown philosophy for investment and is in turn suited for different people.
Fundamentally, from an investment perspective, there is absolutely no difference in the schemes for an SIP led investment from a lump-sum led investment scheme.
Read more: SIP vs Lump Sum
Investment in both lump-sum and SIPs for a particular mutual fund scheme should be driven by the investment objective of the investor.
Furthermore, factors like return expectation, risk appetite, investment duration, and availability of capital determine the scheme and mode of investment.
Myth #8: Periodic investment in stock is better
Some people might think that periodic investment can be done in individual multi-bagger stocks and rupee cost averaging benefit can be gained as well. If that be the case, why would it be better to invest via the SIP mode of investing?
That depends. Most of us do not have the time or skill to carry out good research to purchase good stocks.
Investing in SIP over investing in mutual fund schemes over investing in individual equity stocks has its own benefits. Investment in a mutual fund scheme significantly lowers the risks of investment, as compared to investment in an individual equity stock.
If an investor puts all his money (in SIP mode) in only one particular stock and that stock falls or crashes then the entire wealth of the investor can be wiped out.
As the old saying goes – ‘Do not put all your eggs in one basket’.
Investment in a mutual fund addresses exactly that. By investing in a portfolio of different stocks (each with separate risks and returns) the risks are distributed and lowered.
That is why it is often advised to investment across large-cap, mid-cap and small-cap funds. Multi-cap funds have become increasingly popular for this very reason.
Investment in a mutual fund provides to its investors the benefit of diversification. Moreover, the benefit of compounding and rupee cost averaging also accrue by way of periodic investments.
Myth #9: Investment in a SIP is only meant for long-term
Investment in an SIP though recommended for long-term (especially equity mutual funds), can be subscribed for short-term as well. Depending upon the goal of the investor, SIP period can range from as high as 10+ years to as low as 6 months (generally).
Myth #10: SIP duration cannot be changed
When investing in SIP, you do not need to set any time limit. Once you start SIP, it continues till you make the installments.
If you wish to stop it, you can simply stop the SIP.
So you can start an SIP for a few months to as long as you want.
Myth #11: SIP in any mutual fund scheme will lead to successful investment
It is important to understand that selection of the right mutual fund scheme to invest in is equally or for that matter even more important than the selection of the right mode of investment.
Mutual funds are of different types. Each type is suited for different needs and purposes. It is imperative for an investor to carefully analyze, compare and select the right mutual fund scheme to meet his/ her investment objective.
Various important parameters to keep in mind while selecting the right mutual fund scheme are return expectations of the investor vs the past return record of the particular fund; risk appetite of the investor, investment duration among others.
Selecting the wrong mutual fund scheme is a call for disaster. It is one of the first and most important steps in investing in a mutual fund scheme.
For example, if the risk appetite of the investor is low to medium then the investor should go for an SIP in a multi-cap equity fund. Investing in a small-cap fund can be extremely risky and counterproductive for that particular investor.
SIP is the talk of the town when it comes to investing in the mutual fund and rightly so.
SIP provides the benefits of rupee cost averaging and compounding from a disciplined long-term investing.
It is convenient as the amount of SIP installment is automatically deducted from the bank account of the investor via the Electronic Clearing System.
Moreover, the minimum amount of investment being very low encourages small investors with little disposable income to participate in this investment process.
With the potential to create long-term capital, SIP is attracting attention and gaining huge traction.
While it is a good idea to jump on the SIP bandwagon, it is not a good one to do so blindly. Investors must be aware of these common myths pertaining to and revolving around SIP.
Disclaimer: the views expressed here are of the author and do not reflect those of Groww.