After our last blog on Importance of continuing SIPs amid Covid 19, we have received some queries on SIPs and most of the concerns were actually turned out to be myths. So we have decided to debunk those myths in today’s post.
After our last blog on Importance of continuing SIPs amid Covid 19, we have received some queries on SIPs and most of the concerns were actually turned out to be myths. So we have decided to debunk those myths in today’s post.
For the ones who have not read our last blog, we are starting with a little introduction about what exactly are SIPs.
SIP or Systematic Investment Plan is an effective means of investing funds in the mutual fund territory in accordance with the convenience and discretion of the investor. The periodicity of payments in this case gets determined by the chosen plan. Instances are not rare when retail investors shy away from the usual mutual fund investments due to inadequacy of funds.
A SIP can come to their rescue in such a scenario by helping them in proceeding with small investment amounts on a regular basis. Now, let’s discuss in brief about eight of the biggest SIP myths and examine their validity in its true sense.
Only small investors can benefit out of SIPs
There is a common misconception amongst investors that those having large funds cannot benefit adequately out of SIPs. However, just as its name suggest, SIP creates a systematic investment environment to instil the saving habit amongst its investors who can start with as low as 500 INR per month. Correspondingly, high net worth individuals can invest lacs of rupees in the SIP schemes according to their preferred tenure.
Missing SIP instalments attract heavy penalty
Investors are often worried about being penalised with hefty amounts if they miss out one or more of their SIP instalments. But in reality, no penalty, fine or similar charge is imposed by the Asset Management Companies if investors default on paying their instalments in time.
Let us take the example of Mr A who invests 2000 INR in SIP schemes per month having a NAV of 100 INR. Thus 20 units are added to his portfolio. If the investor defaults on paying a particular month’s instalment, then he will not be able to avail the units belonging to that particular month.
If you want guaranteed returns, SIP can serve as your perfect choice
SIP should never be thought of as a guaranteed return scheme. Investors often think that opting for the SIP method completely eliminates all the associated risks and capital loss. But in reality, the ultimate profits or gains of an investor depends upon the market scenario. In the event of a market crash, an investors capital might totally erode even if he proceeds with SIP investment.
However, the extent of loss in this case shall be significantly lower in comparison to lump-sum investment. SIP is the ideal choice for benefitting out of rupee cost averaging through investment in both high and low prices although it cannot completely eliminate the risk of loss.
You should start with your SIP only during the bear phase
Contrary to this popular misconception, you can also start with SIP investments when the market is undergoing a bullish phase. The main reason behind the same is that an investor can collate more units pertaining to a particular fund on the event of a market correction.
The total number of units held by an investor will keep on increasing coupled with a downfall in NAV of the fund. This brings down the investor’s average purchase cost. His gains will also be higher when the market is correctly valued as he collects greater number of units at a lower average cost.
The entire money invested in a tax-saver ELSS can be withdrawn after 3 years
Under ELSS, a majority of the investor’s corpus stays parked in equity and related products. There is a common misconception related to investing in ELSS funds as investors feel that they can withdraw their entire investment amount after the completion of the 3-years lock-in period. However, this 3 year is calculated starting from the date of investing a particular SIP instalment and not the entire fund itself.
You can take the example of Mr A who is planning to invest 1000 INR every month starting from 1st April 2019 in an ELSS fund. The units purchased on 1st April 2019 can only be sold on 1st May 2022 whereas the ones purchased on 1st May 2019 can be sold only after 1st June 2022. In simple terms, each single SIP instalment is treated as an individual investment having a separate lock-in of 3 years.
You cannot invest a lump sum amount in an ongoing SIP scheme
SIP is merely a mutual fund investment vehicle and it does not impose any restriction on lump sum investment even while proceeding with a monthly payment scheme. Suppose Mr B is investing 1000 INR monthly in a particular SIP scheme with a reputed fund house. If he gets a bonus worth 50000 INR from office and wishes to invest the same, then he can proceed with it readily without hampering his normal SIP investment.
Lump Sum and SIP mutual funds are different from each other
Lump-sum and SIP are simply two different modes of mutual fund investment. While one encourages periodic investment, the other is perfect for bulk investment at one-go. Both these two methods carry their individual investment philosophy and are meant for two completely different sets of investors.
It is better to invest in stock periodically
Mutual fund investments bring down the level of risk when compared to individual equity stock. However, if the investor parks all his money in a particular stock and its value crashes, then he might have to suffer heavy-duty losses. Mutual fund investment however tries to address this common problem by diversifying your investment to an array of stocks each having a separate set of risk and returns.
This distributes and brings down the overall risk by increasing chances of benefitting out of higher returns. This is why fund houses advise investors to proceed with balanced investment in mid-cap, large-cap and small-cap sectors. Alternatively, they can also proceed with multi-cap funds to enjoy the best of both worlds.
Conclusion :
SIP has been accredited with inculcation of discipline amongst the investing folk while safeguarding them from the wrath of inflation. It also leads to holistic participation by a bigger chunk of investors coupled with relatively less risk.
