We have always encouraged our readers to invest in equity mutual funds through SIP (Systematic Investment Plan). This basic idea of recommending SIP is it automates your monthly investment, taking emotions out and hence encourages regular saving. SIP as a concept has become very popular but many people have some common misconceptions about SIP. In this post we would talk about these misconceptions and state the facts.
Myth 1: SIP is an investment
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 lumpsum!
Myth 2: SIP 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 lumpsum money. Also its always good idea to top-up SIP at times when market valuations are low.
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 lumpsum 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 lumsum when you feel market valuations are low.
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).
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.
Myth 9: You cannot stop SIP mid-way or there is penalty if you skip SIP installment
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 fulfill 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 lumpsum 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.
Also Read: How to Calculate Tax on SIP in Mutual Funds?
Myth 12: 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 installment has to be locked-in for 3 years.
Myth 13: 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 installment. So if you want you can start a monthly SIP of Rs 5 or 10 Lakhs. However there is a minimum amount for SIP installment which usually varies between Rs 500 to Rs 5,000 per month.
Myth 14: 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!
We hope these myth busters on SIP investment in mutual funds would help you to make a better investment decision.