With the ever-increasing popularity of mutual fund investments, there has been an increase in the methods of investment. When investing in mutual funds, investors can choose to invest a one-time, lump sum payment or a regular instalment based payment plan - the Systematic Investment Plan (SIP). Many investors are sceptical of making investments through systematic plans as a result of the innumerable myths surrounding this style of investment.
SIPs are for small investors
SIPs are a way for individuals to make disciplined payments towards their mutual fund. While it is possible to make regular payments towards the fund with low amounts, there is no limit to the amount that can be invested on a monthly basis. SIP investments usually have a minimum amount of Rs.500 but there is no maximum limit to the amount that can be invested.
SIPs provide guaranteed returns
While SIPs do lower the risk of losing one’s capital, it does not entirely eliminate that risk, nor does it ensure guaranteed returns. This is a common misconception among most investors who invest when the shares have a high valuation. In case of a crash in the stock market, those who invest in SIPs also stand to lose their capital.
Defaults incur heavy penalties
Many individuals equate the same logic that is followed with loan defaults to missed SIP payments. However, Asset Management Companies do not impose any fines on a missed payment. With SIPs, the investor is purchasing a fixed number of units each month. For some reason, if they are unable to meet the payment schedule, they will simply not be allowed to purchase the units for that month.
SIPs are meant for long-term investments
SIPs have a flexible tenure that can range anywhere from 6 months to over 10 years. While a long-term investment is recommended to receive higher returns and reap the benefits of compounded interest, the tenure for SIPs can be set based on the financial goal of the investor. SIPs do not function the same as lump-sum investments SIPs and lump sum investments in mutual funds are exactly the same. The only point of distinction between the two is the payment schedules. The difference between a lump sum investment and SIP only extends to investor preference.
SIP duration cannot be altered
This is another fairly common misconception among most investors who assume that SIPs function in the same way as loan repayment schedules or instalments for other savings instruments such as the recurring deposit. Since SIPs are voluntary purchases of investment units, an investor need not set a time limit for the SIP. If they ever want to discontinue their investment, they can do so by simply stopping the payment.
Periodic Investments lower risks and yield higher returns
The diversification of an investment portfolio is what makes mutual funds an ideal investment for individuals looking to grow their wealth. Since the investment is made in a wide variety of stocks and bonds and this, in turn, lowers the risk of the investor losing their capital. Investments whether made in lump sum or periodically through a SIP, still carry the same risk if the investment is made in a single type of stock.
A SIP cannot be continued or started when the market is high
Most investors often assume that starting a SIP when the market is high could mean that they would get a fewer number of units for their capital. While this might be true, the number of units also increase when the market falls. With SIPs and most investments, the tenure of the investment has a bigger impact on returns than the climate of the market. Furthermore, SIPs protect investors from the volatility in the market.
SIPs are a great way to grow wealth without having to be too concerned about market trends. Moreover, the flexibility of choosing and changing the tenure and monthly instalment further adds to the convenience of the investment. Perhaps one of the biggest advantages of investing in a SIP is the interest compounded over a long tenure. One of the key reasons that SIPs have been growing in popularity in the recent past is due to the fact that it has tremendous potential to create long-term wealth.