Myths about SIPs

February 12, 2020

Myths About SIP's

Systematic Investment Plan or SIP doesn’t need any introduction. It’s a way to invest in mutual fund schemes, and over the years its popularity has soared by leaps and bounds. As per data by the Association of Mutual Funds in India (AMFI), the industry has currently about 2.84 crore SIP accounts through which investors invest in mutual funds. SIP contribution stood at Rs 92,693 crore for FY 2019 as compared to Rs 67,190 crore for FY 2018. While SIPs offer a range of benefits, several myths surrounding them often lead to poor decision making. This article highlights some of the common myths about SIPs.

1. Investing ‘in’ SIPs

  • SIPs are not an investment themselves, but are a mode of investment. You don’t invest ‘in’ SIPs, but invest through them. They are an investment mode where generally a pre-determined amount is deducted at a pre-defined interval and invested in your chosen fund.

2. SIPs require a huge amount to get started

  • You can start investing from as little as Rs 500 per month. Also, SIPs allow you to top up the amount with a rise in income. In other words, you can increase the SIP amount in the same fund, if desired. This helps in accumulating a larger corpus.
  • For instance, if you invest Rs 5,000 per month for a period of 15 years in a fund offering annualised return of 8%, the accumulated corpus would be a little over Rs 17 lakh. However, in case you increase the SIP amount by even 10%, i.e. Rs 500 every year, the corpus accumulated above would be Rs 27 lakh (subject to market risks).
  • With SIP (Without Top-up SIP): Rs 17,41,726
  • With SIP top-up: Rs 27,07,703
  • Increase in amount accumulated for your goal: 55.46%

3. Flexible SIPs are better

  • Flexible SIPs allow you to change the SIP amount depending on market dynamics and cash flow. In such SIPs, when the markets are up, the amount is increased and vice-versa. While there’s nothing fundamentally wrong in opting for flexi SIPs, to assume that it’s better than regular ones where a specific amount is invested every month is a myth. An objective of SIP is to remain invested irrespective of the market highs and lows to average out the cost of investing. Flexi SIPs are akin to timing the market. It’s almost impossible to predict when the markets will peak, and when they will bottom out. In such a scenario, it’s advisable to opt for regular SIPs.

4. SIPs will always give positive returns

  • Many investors believe that SIPs will always yield positive returns. However, that’s not the fact. SIP is an investment vehicle through which you invest in a mutual fund. If the fundamentals of the fund are weak, with risky underlying assets, then your SIP may not give positive returns.
  • It’s the fund that gives returns and not the SIP. Therefore, it’s not necessary that SIPs are a sure shot way to earn positive returns.

The final word

  • Bringing discipline into investment, SIP investment is an advisable way of accumulating a corpus for various life goals. Now that the myths surrounding them are clear, it’s time to start your SIP today!

 

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