SIP is a method of investing in mutual funds. Instead of investing a lump sum, you divide your payments over a period according to your convenience. The periodicity of the SIP can be monthly, quarterly or annually. SIP is a boon for investors who do not have the cash to invest a lump sum amount. However, like most successful things there are many myths surrounding the concept of SIPs.
Here are some of the most common myths –
Only for Small Time Investors
Sip is a systematic investment strategy that inculcates good investment habits regardless of the type of investor you are. While there is a lower limit to the amount you can invest per instalment, there is no upper limit.
Instalment Defaults Result in Huge Penalties
The truth is there are no penalties if you miss paying your payments. The only thing that happens is that you miss the opportunity of buying the units that were slated to be bought during that period.
SIP Guarantees Returns
No mutual fund scheme ever guarantees returns. It does, however, minimise the risk of losing the capital. This is because the money is being invested as instalments and not as a lump sum. It is among the major benefits of SIP.
Do Not Start A SIP When Market Is High
On the contrary, it is the best time to start a SIP. This is because you will be able to collect more SIP units for a given price by the time the market returns to its stable condition. It translates to more gains while the NAV is falling.
Lump Sum Investment Is Not Possible In SIP
You can invest a lump sum in your SIP scheme as there is no upper limit to the instalments and there are no penalties for missing an instalment. From the perspective of the investment, a lump sum deposit and deposit in parts make no difference. You instalment value should match your risk appetite, investment objectives, the period of instalment and amount of money available.
Benefits of SIP is Limited to Long-Term Investments
Although it is recommended to go for long-term investments, especially with equities, you can also opt for shorter terms. The duration of the SIP can be anything from 6 months to more than 10 years.
Time Period of SIP Cannot Be Changed
There is no fixed period when it comes to a SIP. The SIP continues as long as you pay the instalments and is not active when you are not paying. You can stop the SIP at any time you wish to.
SIP in Any Mutual Fund is Successful
Just by starting a SIP your investment will not be successful. You have to devote time to selecting the correct schemes to invest in. You have to properly analyse and compare the various funds available and select the best fund to suit your needs.
A large number of people are subscribing to SIP. It gives you the benefits of a cost averaging and compounding investments. Since it has the potential for wealth creation, having accurate knowledge about what is SIP and the benefits of SIP are essential. Once you have the knowledge, you can make the best of your investments and meet your short-term and long-term financial goals.
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