Why are there so many misconceptions about SIPs?
With the increasing number of individuals investing in SIPs, discussions on them have also grown. This has helped to raise awareness; however, it has also given rise to a lot of misinformation.
One of the biggest reasons for confusion is that many people assume SIPs and mutual funds are the same thing. It isn't the same, in fact. The investment product is a mutual fund, and SIP is just a way of investing in that fund at fixed intervals.
These perceptions have also been fueled by market volatility. Some investors think that markets are always booming and SIPs give a high return. Others believe that SIPs are no longer effective during market downturns. The two assumptions are false and incomplete.
The first step to understanding common myths about SIPs is to understand that SIP is merely a means to invest regularly. Your returns will be based on the return performance of the mutual fund you invest in and how long you hold your investment.
Myth 1: SIPs guarantee fixed returns
This is perhaps one of the most common myths about SIPs. A SIP is not an investment product itself; therefore, it does not guarantee returns. It's nothing more than a rule of investing regularly in a mutual fund. The returns generated in your SIP are solely based on the performance of the underlying mutual fund. Mutual funds invest in market-linked assets, which fluctuate in value with market conditions.
Hence, it's important to have realistic expectations when using SIPs. While disciplined investing over the long term has the potential to create wealth, no market-linked investment can promise fixed or guaranteed returns. Rather than the promise of return, select investments that suit your financial objectives and risk tolerance.
Myth 2: You need a large amount of money to start investing through SIPs
Many people put off investing because they believe that they must have a large amount of money to get started. In reality, there are a number of mutual fund schemes that enable investors to make relatively small investment amounts to initiate SIPs. That makes SIPs accessible to students, young professionals and anyone who starts his/her investment journey.
The most important thing is to invest regularly rather than investing a lot of money. It's possible to save small amounts consistently over time and see them grow as a result of discipline and compounding.
Early investment means more time for investments to grow. More often than not, it's better to start investing now with what you can afford than to wait until you have enough so that you can invest more.
Myth 3: SIPs eliminate all investment risk
SIPs have been termed as an investment strategy which follows a disciplined pattern, but they are not a risk-free investment. Mutual fund values may change because of investment in market-oriented securities. A SIP will not ensure that markets go up or down, but it will help you to invest consistently in the market, even if it falls.
Rupee cost averaging is one of the benefits of investing via SIPs. During a down market, the investment acquires more units, and in an up market, it gets fewer.
This can help even out the cost of your investments over time. But this doesn't remove the risks. Investing in the right mutual fund, depending on investment objectives, investment time frame and risk appetite, is equally critical.
Myth 4: SIPs should be stopped when markets fall
When the market drops, it can make any investor nervous. When your investments are losing value, you might be concerned about whether to opt out of the SIP or not. However, market corrections are a common aspect of investing. In fact, they're one of the reasons SIPs are designed the way they are.
In a down market, the SIP amount procures more MF units than when the rates are high. This is called dollar-cost averaging. While it doesn't guarantee profits, it can help lower the average cost of your investment over time.
Think of it this way. When you like your product and its price drops, you are probably happy, because you can get more of your favourite product for the same price. A SIP works in the same manner when the market dips.
If your SIP is halted when the markets are volatile, then you might find it difficult to follow it. It is better to focus on your financial goals and maintain your investment consistency, rather than getting caught up in short-term fluctuations.
Myth 5: SIPs are only meant for long-term investors
Although it's a fact that SIPs are generally linked to long-term investment, this doesn't imply that they're reserved for long-term objectives. Mutual funds are now available for various investment periods and investment goals.
With the SIP, you can achieve several goals, some that are nearer the horizon and some that are much further. Depending on the type of mutual fund you invest in, you can achieve goals which are a few years away or which are much further.
For instance, a person who is saving for his children's education several years in the future might select a different mutual fund (equity funds) than a person who is saving for a short-term financial target (debt/liquid funds).
The duration for investment should be based on your investment goal and the type of fund you choose, and not on a rule that SIPs are meant only for long-term investments. The important point is that you invest on the basis of your financial goal and not a generic approach.
How to evaluate SIPs beyond the myths
Having addressed some of the major misunderstandings, the next step is to know how to assess a SIP correctly. The first question you need to ask yourself is why you're investing. Do you plan to save for your home, grow your retirement savings or build wealth over time? It helps to make the right mutual fund decision when you have a definite objective.
Next, think about your comfort with risk. Every investor is different, so it's important to select investments that match your own risk appetite instead of copying someone else's portfolio.
It's also worth remembering that past returns shouldn't be the only factor when choosing a mutual fund. Past performance is not necessarily indicative of future performance. The consistency and suitability of your goals when you start looking at the fund's investment objective are also crucial.
Lastly, check your investments only on a regular basis, not daily. The markets fluctuate in the short term, but reacting to these changes all the time may result in emotional decision-making. It may be more effective to use a disciplined approach and regular reviews than to attempt to time the market.
Conclusion
Though one of the fastest-growing investment options for mutual funds, SIPs are also one of the most misunderstood options. A lot of common myths about SIPs are because they mix up the investment method with the investment itself.
A SIP is not a guarantee of returns, does not remove market risk and doesn't guarantee instant wealth. Rather, it fosters disciplined investing, in that it enables consistent investing over time.
The better informed you are about how SIPs really work, the better you will be able to avoid setting unrealistic expectations and make informed investments.
Don't let myths sway your decisions; stick to your financial objectives, invest regularly and check your portfolio now and then. Successful investing isn't a matter of shortcuts, after all. It's all about keeping up to date, being patient, and letting your investments run their course.
