Systematic Investment Plans (SIPs) have become immensely popular with lakhs of individuals opting for them. Almost 9000 Crores of amount hits the bank accounts of the proud SIP owners. SIPs definitely are an effective tool to multiply your wealth, but their growing popularity has resulted in certain misconceptions among investors. Given below are 15 popular SIP myths that you might have about SIPs.

One must clear these SIP myths before understanding & investing in a SIP.

Common SIP Myths & SIP Misconceptions

Frequent SIPs give higher returns

Some investors have the wrong idea that if they increase the frequency of SIPs to fortnightly, weekly or even daily, they will obtain better returns.

Time after time, research has shown that this kind of investor behavior has no substantial impact on earnings and it only adds to the operational troubles for investors.

One invests ‘in’ a SIP

We often hear from our prospects that they want to invest ‘in’ a SIP. The fact is that a person invests ‘through’ a SIP in mutual funds.

SIPs are not a category of investments on their own; they are a method to invest in a particular fund. In due course, returns are driven not only by SIPs but by the primary fund.

Discontinuing SIPs in the bear phase is beneficial

A blatant SIP myth! During a bear phase, some clients stop their SIPs out of fear of losing money. When markets pick up, they invest again. Timing SIPs can be harmful to their portfolio.

When SIPs are discontinued during the bear phase, investor misses the chance to average out the buying price. Moreover, they will suffer an opportunity cost when the market unexpectedly begins racing.

SIP Myths – SIPs are only for small investors

SIPs start from Rs 100, this does not mean it is for small investors only. SIP is for fulfilling goals and it can be of any value. The benefits or returns are in percentages and same way effects the portfolio – irrespective of the amount invested.

Whatever budget or savings you must SIP! It’s a SIP myth that SIP is for a particular investor class.

SIPs are only suited for equity funds and not funds

If you have been using our Wealth Management Service you would have noticed that we start with emergency fund creation and if it is built with SIPs, they are in Debt Funds.

You will love to read this too Should You Invest in Upcoming IPO's

SIP does well if the fluctuations are more. But SIP is also a disciplined way to accumulate & invest.

If you are investing as per fixed asset allocation like 70 equity & 30 Debt, your SIP should also go in the same proportions.

Check out Interesting Free Ebooks & Calculators – Downloads

Sip cannot be changed or altered in future

SIP features like, tenure scheme, amount, the frequency can be changed with some form filling or online. So SIPs are flexible but yes process needs to be followed.

SIP (Myths) offers Guaranteed Returns

A mutual fund SIP offers no guarantee of returns as it invests in an underlying mutual fund scheme and none of the schemes can guarantee returns. That’s regulators order. So if someone is saying it offers fixed returns he is completely lying.

SIP will never incur a loss

If your SIP is in equity funds it is a likely chance that you may incur losses an capital erosion in short to mid-term. You are investing in equity by SIP mode, so equity will not turn debt!

Be ready for fluctuations as you witness with lumpsum investments. Yes, averaging works in SIP but it works both ways- You may get cheap during low & range-bound markets, but may get dearer units when the market moves up. But averaging works here keeping the combined price of buying below in long runs.

SIP is for Short Term only

Equity SIPs are never for short term but yes SIPs in debt funds can be done for the short term. It just works out like and RD (recurring deposit) with banks. This for the simple reason that in short term Equity can be volatile. SIPs can be planned in Equity, Debt or Hybrid funds as per time horizon of the goal.

Equity SIPs are suggested for long term goals because to fulfill these goals you have time in hand. The image below shows, more the number of years for a SIP, it has gained more.

You will love to read this too COVID 19 Impact on Finances of NRIs

But while selecting a debt fund for a short term SIP, one must take care of exit loads & debt mutual fund taxation. As load & tax reduce overall returns.

SIP has low returns

In most long cases, SIP has given more returns than a lumpsum investment. This is because of averaging.

Look at the above image… these are actual average returns. Do you think these are less compared to other assets?

The returns are a function of an asset in which you do SIP. Averaging over long cycles will average returns and ring down per-unit cost. So SIP has given more returns than lumpsum in most equity funds.

SIP will lead to charges from Bank

Some banks do charge (Rs 35 to Rs 200) for registering SIPs. But very few do it and it keeps changing. The benefits of SIP is more than this small initial cost. Check with your bank. If you have a good relationship with the bank, they can waive that too! But they will try selling their own stuff (RD, SIPs, MFs, Gold Coins, etc). (I scratch your back, you scratch my back).

SIP withdrawal is too technical to understand

While withdrawing 2 things need to be checked.

One- Exit Load. Every installment is a purchase. So every installment should be over the time frame mentioned for exit load. First in first out. Eg if the fund has an exit load of 365 days, means all installment should cross 365 days. First SIP date is not the date of purchase. So if you withdraw after 14 months, units accumulated in the first 2 months will be free from the load as they have crossed 365 days. For rest units, the rate at which withdrawal will be done will be more (NAV plus Exit Load).

Two – Lock-in. Since every installment is purchased it every purchase need to pass the lock-in period. In the same example above suppose it was a SIP in ELSS (Tax Saver) fund with a lock-in of 3 years. Suppose you are withdrawing at the end of 4th year, only units accumulated during the first 12 months will be free. Others need to wait for 3 years.

You will love to read this too Financial products for financial freedom - Happy Independence Day !

SIP means no Lumpsum

Another Classical SIP Myth. Nothing of this sought. You can make lumpsum purchases in the same folio subject to minimum investment amount accepted by that MF Company.

Can be done in Mutual Funds only

NO, SIP is almost now used synonymous to MFs but it is a concept of investing regularly at intervals in and asset whose price changes. So it can be done in Stocks, gold, other commodities. Check out the risk for other products!