A systematic investment plan (SIP) involves a disciplined approach to investing, in which investors make consistent, regular payments in a mutual fund over a certain period to build wealth in the long term.
As more and more people learn the benefits of investing via SIPs, a few misconceptions about SIPs have been created. For example, some would think whether it is safe to try their hands on SIPs, if they pay interest, or if they are tax-free.
For the sake of proper financial literacy, investors need to discern fact from fiction concerning SIP investing and decide which investment route to take.
Here, we clarify seven of the most common misconceptions about investing through SIPs in mutual funds.
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Only Small Investors Can Participate in SIPs
Many high-net-worth individuals and wealthy investors take part in the markets through SIPs. While SIPs offer the option to invest in small amounts, that does not mean that investors are required only to contribute considerable amounts to invest through SIPs.
If you’re an investor who has a small but stable amount of money available for investment, SIPs are an excellent option for you. You also can invest as much you want, considering the investment method for SIP. You only need to take care of the Know Your Customer (KYC) requirement, and you’re good to go.
Moreover, investing via SIP will help you regularly make investments in the market. Every investor can do that so they can save money for the long term. That is why it should not be assumed that only small investors can invest in SIPs.
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SIP is an Investment Instrument
SIP is not an investment instrument in itself. Rather it is a type of investment option that enables market players to invest on a regular basis.
Investors have a wide range of mutual fund schemes that they can choose from. The investment amount is subtracted and put into the scheme. The mutual fund schemes you decide to go for will depend on the level of risk you’re willing to take and your financial goals.
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SIP is Unchangeable Once Finalized
Another misconception that makes many investors wary about SIPs is that SIPs cannot be modified once they have been finalized. Note that SIPs are one of the most ideal methods of investing. It provides flexibility in the way investors bet on the markets.
So even if the SIP carries out, you can still make some changes on the investment amount, period, and the mutual fund scheme of the SIP.
Investors are free to alter the SIP amount and the investment period according to their needs. They can adjust the SIP amount if they’re looking to save or ramp up their investments or if their income receives a boost or a blow.
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SIPs are Only for Equity Funds
SIP is a proven method of investing in mutual funds, especially equity funds. However, the belief that investors can bet only on equity funds via SIP is another misconception.
If you’re investing in mutual funds through SIP, you should know that you have many options to choose from. SIPs can also be done for other funds such as debt funds, hybrid funds, index funds, fund of funds, and thematic funds.
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SIP in Funds with Low NAV Deliver More Returns
Net asset value (NAV) is vital to invest in. But it does not determine how high or how low the return you can receive from a mutual fund scheme. That is why you should avoid believing that low NAV mutual funds are more affordable and have better odds of generating higher returns.
The NAV represents the market value of a fund for every share, and it is always subject to change. So while it is true that a lower NAV can give you more mutual funds units, the NAV itself can’t determine your potential returns. Instead, you should pay more attention to the fund’s performance than the NAV.
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SIP Returns are Guaranteed
Investing via SIPs in mutual funds is a safer option than equity markets, although the funds can still be exposed to risks, depending on market volatility.
An investor may have a tough time securing guaranteed returns in the short term. On the other hand, investing in mutual funds provides room for appreciation in the long run.
That is why you should keep in mind that investing always carries risks. So, you need to be properly equipped to deal with volatility before entering the market and making an investment.
Additionally, investing in mutual funds through SIP grants investors the opportunity to take advantage of dollar-cost averaging (DCA).
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It’s a Bad Idea to Invest via SIP in a Rising Market
You need to learn nearly everything there is to learn about the discipline, patience, and research necessary to invest in mutual funds. SIP investments often provide high yields in the long term. It is essential to consider the bullish and bearish periods if you’re investing in large amounts.
Many SIPs present results in the long run, but it is pretty impossible to time the markets in real-time. Theoretically, you can buy when prices are down and sell when prices are up. However, that is not possible with practical choices.
You don’t need to wait for the right time to invest in mutual funds through SIPs. Instead, you need to invest as soon as possible and maximize the power of compounding.
SIPs counter the impact of volatility on investment portfolios. As you invest through SIPs, the dollar-cost averaging weakens the impact on your portfolio with time.
The Bottom Line
Investing via a SIP will require you to have a long-term investment horizon. And since discipline is a crucial factor in SIP investing, a solid strategy combined with patience can better your odds of wealth-building over time.
You also need to consider the historical performances of mutual funds and remember that it is always a good time to invest in them. The earlier you invest, the more returns you could generate in the future.
