Is SIP a Mutual Fund? What is the difference between Mutual Funds Vs SIP? These were some of the questions I was asked by some one close to me and obviously not financially savvy.
I think SIP or Systematic Investment Plan have been marketed so well by mutual funds that it has been misunderstood by a lot many as a silver bullet of investment. This may be good for mutual fund business but not for investors. Some people think SIP is safe, SIP is Tax Free and SIP pays Interest. In this post we try to debunk and clarify some of the commonly misunderstood points of SIP.
- 1 What is SIP?
- 2 Why is SIP a good way to Invest?
- 3 Is SIP a Mutual Fund?
- 4 Myth 1: SIP is an Investment Instrument
- 5 Myth 2: SIP is Safe – It would always give positive returns in the long run
- 6 Myth 3: SIP is Best way to invest
- 7 Myth 4: With SIP fund selection is NOT important
- 8 Myth 5: Should invest in all mutual funds via SIP
- 9 Myth 6: Market too high to start or continue SIP
- 10 Myth 7: Daily SIP is better than Monthly SIP
- 11 Myth 8: You can get better returns by timing the SIP date
- 12 Myth 9: You cannot stop SIP mid-way or there is penalty if you skip SIP instalment
- 13 Myth 10: I cannot make lump sum investment in a fund where my SIP is running
- 14 Myth 11: For taxation purpose the start date of SIP is used to determine investment period
- 15 Myth 12: Is SIP Tax Free?
- 16 Myth 13: I can withdraw money entire from ELSS after 3 years of SIP
- 17 Myth 14: SIP is for small investors
- 18 Myth 15: There are SIP for ULIPs too
- 19 Myth 16: What is SIP Interest Rates?
What is SIP?
SIP stands for Systematic Investment Plan. As the name suggests its a “systematic” way of putting money in Mutual Funds. You can decide on a fixed date every month (quarter or even each working day), where the money is automatically deducted from your bank account and used to purchase mutual fund units. You can decide on the amount of investment, the fund you want to invest, the dates with some conditions. The basic idea of recommending SIP is it automates your monthly investment, taking emotions out and hence encourages regular saving.
Why is SIP a good way to Invest?
As many want to make you believe SIP is silver bullet of investment. This is not true. It is a good way of investment and suits someone with regular income. It inculcates discipline in investment and helps you save without any emotion of the stock markets. It also suits if you want to invest in equity mutual funds over long period as it takes care of market volatility to an extent.
However, there are times when investing all your money as lump sum is a better idea especially when markets are undervalued. We have a detailed post comparing SIP Vs Mutual Fund Lump sum Investment – and what works in which situation. Next we list the myths and the facts about SIP.
Is SIP a Mutual Fund?
No SIP is not a mutual fund. Mutual Fund is an investment instrument where you invest money and get returns. However SIP is a disciplined approach to invest money in Mutual Funds. Mutual Funds can be of multiple types depending on what they invest into. Mutual Funds can be equity based if they invest majority of their corpus in stock market, it can be Debt Fund if they invest majority of their corpus in debt instruments. Similarly there can be Gold Mutual Fund, Global Mutual Funds (depending on geographical markets they invest) and so on. However you can still do SIP in all these funds.
Myth 1: SIP is an Investment Instrument
Truth: You ask certain people about their investment and you are told they are in investing in SIP. Well SIP in itself is not an investment it’s just one of the methods of investment wherein you can invest a fixed sum for a pre-defined period in selected mutual fund schemes. The actual investment is the mutual fund scheme you are investing in. Also there is NO SIP fund. Some think that mutual funds have different version of funds – one for SIP and other for lump sum!
Myth 2: SIP is Safe – It would always give positive returns in the long run
Truth: Nothing can be farther from truth. Most projections show positive results over long run as they always assume a fixed percentage return. Unfortunately this is not how stock markets behave. There returns can be as extreme as getting halved in a year to doubling or may be give absolute 0 return in a year. So in case you calculate SIP returns in year the market has crashed you may have negative returns even in long term (and so would lump sum investment). Also if the returns are always positive lump-sum investment would give higher returns than SIP.
Myth 3: SIP is Best way to invest
Truth: There is No best way to invest. SIP is suited for people with regular income like salaried while lump sum investment is more suited for irregular income like self-employed or when you get lump sum money. Also its always good idea to top-up SIP or invest lump sum at times when market valuations are low.
SIP Vs. Mutual Fund Lump sum – Which is the Best way to Invest in Mutual Fund?
There is always a debate on what is the right way to invest in Mutual Funds – SIP or lump sum? We give you examples and situations on which of the investment method outperforms. Do read SIP Vs. Lump sum – Which is the Best way to Invest in Mutual Fund?
Myth 4: With SIP fund selection is NOT important
Truth: As I said in the earlier point that some people confuse the SIP as investment whereas but the important point is to select the right set of funds to invest. In case you choose under performing fund lump sum or SIP, both would give poor returns.
Myth 5: Should invest in all mutual funds via SIP
Truth: SIP is well suited for equity mutual funds as it removes emotions while investment and helps to take advantage of volatility. However in case of debt funds, you should not do SIP if you can invest lump-sum as there is no volatility in most cases. In case you want to invest at regular intervals like recurring deposit to accumulate some amount, SIP in debt mutual funds make sense. Also in most cases, SIP in debt funds is more tax efficient than recurring deposit.
Myth 6: Market too high to start or continue SIP
Truth: SIP is a way to take advantage of volatility and hence should be continued irrespective of market levels. Start SIP when you are able to do it, but as stated earlier do top-up SIP with lum sum when you feel market valuations are low. Also SIP in Mutual Funds create real wealth if done over long periods of time without interruption.
Myth 7: Daily SIP is better than Monthly SIP
Truth: There are monthly, quarterly and now daily SIPs options available for investment in mutual funds. However we did analysis few years back and concluded monthly SIP suits most investors as it matches with the cash inflow (most people have monthly income).
Why Investing in Mutual Fund NFO is a Bad Idea?
As the stock market soars, so does the Mutual Funds NFOs. However our analysis says that NFOs are more profitable for sellers and the companies selling them rather than people investing in them. There are only few NFOs worth looking at. Read the detail on Why investing in NFO may not be a great idea.
Myth 8: You can get better returns by timing the SIP date
Truth: SIP date is irrelevant and we have analysis to prove that. My idea is to have SIP on date which is closer to your salary date as you can easily fulfil you investment commitment before anything else. Also in case you have multiple SIPs you can spread it out across different dates in a month in case you are worried about what if market falls after you invest – This is just an emotional piece rather than actually making a difference in your overall returns over long periods of time.
Myth 9: You cannot stop SIP mid-way or there is penalty if you skip SIP instalment
Truth: The above myth is result of many people equating the SIP investment with EMI that they pay on loan. You must understand that EMI is your liability and legally you have to fulfil that however SIP is voluntary which you are doing to create wealth. You can always stop SIP midway by writing to the respective fund house. Even in case you do not have sufficient funds in bank account on SIP date, the worst charges you would face is of “insufficient funds” and that too by your bank and not mutual fund. This no way impacts your credit score (in case someone may be wondering if the bounce auto-debit above would be recorded negatively).
Myth 10: I cannot make lump sum investment in a fund where my SIP is running
Truth: As we stated earlier it’s a good idea to top up SIP investment with lump sum investment when market is low and you have money. You can use the same SIP folio number for lump-sum investment.
Myth 11: For taxation purpose the start date of SIP is used to determine investment period
Truth: each investment of SIP is considered as fresh investment for taxation purpose. We have covered taxation of SIP in details in one of our post.
Myth 12: Is SIP Tax Free?
No SIP is not Tax Free. SIP is a way to invest in Mutual funds. Your tax would be based on the way mutual funds are taxed. If you invest in equity mutual funds and sell it after one year of investment, the gains are called long term capital gains and taxed at 10.4%. We have covered taxation of SIP in details in one of our post.
How Tax on Mutual Funds Impact your Returns in FY 2021-22?
Equity Mutual Funds are one of the best investments to generate wealth in the long run while Debt mutual funds are more suited to park money for the short term (as an alternative to fixed deposits). But as in case of any investment, the final returns are determined on the way these Mutual Funds are taxed. We discusses tax on mutual funds for FY 2021-22 [AY 2022-23] in all details.
Myth 13: I can withdraw money entire from ELSS after 3 years of SIP
Truth: ELSS Funds or Tax Saving mutual funds have lock-in for 3 years. When you do SIP in ELSS, each instalment has to be locked-in for 3 years.
Myth 14: SIP is for small investors
Truth: Most people think that SIP is for small investors. Unfortunately this is not the truth as most mutual funds DO not have an upper limit for SIP instalment. So if you want you can start a monthly SIP of Rs 5 or 10 Lakhs. However there is a minimum amount for SIP instalment which usually varies between Rs 500 to Rs 5,000 per month.
Myth 15: There are SIP for ULIPs too
Truth: ICICI Prudential have a ULIP in the name gSIP (Guaranteed Savings Insurance Plan). This is to encash on the popularity of SIP in mutual funds. Also agents from LIC and other insurance frauds started similar products. So be careful when you look the word SIP!
Myth 16: What is SIP Interest Rates?
As we stated earlier SIP is not an investment instrument, so it does not give returns in terms of interest rates. The right question to ask is what is the return you can expect from a Mutual Fund if you invest through SIP.
We hope these myth busters on SIP investment in mutual funds would help you to make a better investment decision.