Investors are often deterred from the right investment choices because they hear many opinions from different individuals. However, such opinions are mostly formed on half-baked truth and are based on a foundation of myths. The sad news is that these myths are popularised to such a large degree that they have almost become the truth.
There are certain myths surrounding SIPs (Systematic Investment Plans) as well. While experts and advisors try their best to do away with such notions, these myths still persist.
What you will be reading further is an attempt to debunk these myths and bring SIP closer to the facts:
Table of Contents
Myth #1: SIP Investments Are Short-Term Investments
This is the most common myth surrounding SIP investments, especially when it comes to SIPs in equity funds. People are quite cynical about investing a regular sum in a mutual fund SIP, especially in equities. The myth is that equity investments are for short-term and debt investments are for long term.
The Reality:
The reality is vice versa. Debt products generate good returns in favourable or high interest rate cycles. However, equities provide opportunities to generate wealth in up cycles and buy cheaper in down cycles. Investing through SIP for long-term actually does a good job of cost averaging.
Thus, make sure to run your SIP investment for the long term to take advantage of the market volatility.
Myth #2: SIP Is Only for Small Investments
SIP investments mean investing small sums regularly. However, it does not infer that SIP is for small investors only.
The Reality:
In general, SIP investment means- regular, disciplined, and long-term investment done with the help of an autopilot mode. It is meant to provide an opportunity for all – investors with limited as well as high savings.
Whether you are a High Net-worth Individual (HNI) or a small investor,whether you invest Rs 1,000 a month or Rs 10,000 a month, rupee cost averaging works alike for everyone.
Myth 3: SIP Returns on An Absolute Basis Are Low
Many investors ignore the XIRR (Internal Rate of Return) of their investments and only look at absolute returns. Generally, in a short-term SIP, the absolute return may look lower than the XIRR or CAGR (Compounded Annualised Growth Rate) returns.
The Reality:
XIRR a better way of looking at your investment returns, when you are comparing it across other asset class yields. Remember that in a SIP investment, an entire lump sum is not invested in one go. Investments through the SIP mode are made at various points in time.Since there are no one point-to-point annualised returns, the returns are better captured using XIRR (taking into account the varying times of investment).
Myth#4: If You Agree On A Particular SIP Amount Every Month, You Cannot Change It
Another common myth about SIP investments is that once you commit to investing a particular amount, you cannot change it. People believe that if they change the amount, they would be penalised. This is untrue.
The Reality:
If you decide to invest Rs 1,500 a month through a SIP and want to change it to Rs 1,000 or Rs 3,000 next month, you have the total flexibility to do so. There is no penalty or charges levied for the same.
Myth#5: There Is Penalty Levied If SIP Is Stopped In Between
The Reality:
You can continue or stop a mutual fund SIP at your own convenience. There is no penalty or charges for stopping your SIP investment. You only need to provide a duly signed written request for the same.
Conclusion:
People have different opinions when investments are considered, especially SIP investments. However, it is necessary to examine the degree of truth in it before the myths are accepted as facts.
SIPs have been suffering the blow in the hands of the myths, worrying investors about the rumours that are floating. Instead, know the truth, and let your rational mind to shift from myths to facts. The unearthed facts should bring you a step closer to investing in SIP.
So, know your long terms goals, understand your risk profile and get set with your SIP investments!
About Carson Derrow
