in Education, Finance, Mutual Funds

Debunking 6 common myths about SIP

Investing in SIPs or Systematic Investment Plans isn’t as complex or daunting as most young investors think it is. If anything, SIPs are a great tool for building wealth, saving tax, and meeting both short and long term goals. Yet, salaried professionals or businessmen don’t use this to its fullest potential due to various myths and half-true facts they harbour about SIPs. Let’s debunk some of the most common myths that keep you away from unlocking the full power of SIPs.

Myth 1: SIPs are compulsory investments. Missing an EMI is not an option.
The ‘S’ is for Systematic, not statutory. The fact is that SIP remain one of the most flexible investment instruments. With the right fund manager, you can modify or even skip your upcoming installment. What else, you can even change your portfolio to add a different mutual fund depending on market and recommendations from your fund manager. While it is okay to skip your SIP in case of a fund crunch or unexpected expenses, use this option as the last resort. A sum of Rs. 5000 that you don’t invest in SIP next month can become Rs. 33700 in 20 years.

Myth 2: SIP is ideal only for small investors
Not at all. Sadly, most of the salaried class investing through SIP uses it for tax saving and not for wealth creation. Whether you have five thousand or five lakhs, the rules remain the same. You get more money than an FD or an LIC policy. You get inflation-beating returns and your investment enjoys compounding growth. If anything, large investors can generate more wealth by diversifying their Mutual Fund investments through SIPs. For those with a larger risk taking appetite, funds like SmallCap, MidCap, and Sector Funds are strongly recommended owing to their high risk high return potential.

Myth 3: SIP Mutual funds and lumpsum mutual funds are different
Let’s understand this with an example. When you invest into Mutual Funds, you can invest either a lump sum once, or you can invest periodically, through a Systematic Investment Plan. SIP is just a mode of investing just like a lump sum, and you can use either while investing into Mutual Funds.

Myth 4: Rupee cost averaging in SIP is possible in stock investing as well
Let’s under Rupee cost averaging first. When you invest fixed amount of money to buy units of a Mutual Fund (or any investment) at periodic intervals, you end up buying more units when the cost is low, and fewer units when the cost is high. This way you lower your average cost of investment. While this theoretically holds true for investing in single stocks, but the benefits are not even close. The magic of investing through SIP in mutual funds is in the diversification, the professional fund management, and of course, compounding.

Myth 5: Market is too high or too low so I shouldn’t start an SIP now
Because of its systematic investment, SIP is a time-agnostic method. Since you invest every month or quarter (Systematic, remember?) you offset against the volatility of the market. In simpler words, some units are bought at low price and some at high price, balancing the overall cost and growth for the whole corpus. SIP investments hold their fort against short to mid term volatility.

Myth 6: SIP is only for tax saving
SIP is an investment plan, not a tax-saving plan. Using SIP you can invest under ELSS or Equity Linked Saving Scheme to save taxes. But that’s only one of the places to put your money. As mentioned above you can invest into MidCap, SmallCap and Hybrid funds depending on your risk appetite and your goals. SIP’s real potential is wealth creation, and not merely tax saving.

If you were harbouring any of these myths, I hope they are now dispelled and won’t keep you from investing into SIPs as an instrument to meet your financial goals. Just find the right platform, and start investing.

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