Systematic Investment Plans (SIPs) have become increasingly popular among investors looking to invest in mutual funds.
Despite their growing popularity, there still exist numerous misconceptions about SIPs that can deter potential investors from reaping their benefits.
This blog post aims to debunk the most common myths and misconceptions surrounding SIP investments, providing accurate information for potential investors.
SIPs are only for small investors
One of the most common misconceptions about SIPs is that they are only suitable for small investors.
This could not be further from the truth.
SIPs are an investment tool that caters to investors of all financial backgrounds and investment goals.
The beauty of SIPs lies in their flexibility, allowing investors to start with small amounts and gradually increase their investment over time.
This makes SIPs an excellent choice for both small and large investors looking to build their wealth systematically.
SIPs guarantee returns
It is essential to understand that SIPs are not guaranteed return investment products.
Instead, they are a method of investing in mutual funds, which, in turn, are subject to market risks.
The performance of your SIP investment depends on the performance of the underlying mutual fund scheme.
While SIPs help reduce the impact of market volatility by averaging out the cost of investment, they do not eliminate the risks associated with market-linked instruments.
SIPs are only for long-term investments
Another misconception about SIPs is that they are suitable only for long-term investments.
While it is true that SIPs work best when held for an extended period, they can be used for short and medium-term financial goals as well.
The key is to choose the right mutual fund scheme based on your investment horizon and risk tolerance.
For short-term goals, consider investing in debt funds, whereas equity funds are better suited for long-term objectives.
SIPs require a fixed investment amount every month
Some potential investors believe that they must invest a fixed amount every month in SIPs.
In reality, most mutual fund houses allow investors to choose between fixed and variable SIPs.
With a fixed SIP, you commit to investing a pre-determined amount regularly, whereas a variable SIP enables you to invest varying amounts at different intervals.
This flexibility allows investors to adjust their investment contributions based on their financial situation.
SIPs are the same as recurring deposits (RDs)
It’s crucial to distinguish between SIPs and recurring deposits (RDs) since they serve different purposes and carry different risk profiles.
While both involve regular investments, RDs are a type of fixed-income instrument offered by banks, where you deposit a fixed sum of money every month and earn interest on it.
SIPs, on the other hand, involve investing in mutual funds and are subject to market risks.
The returns from SIP investments are not guaranteed, unlike RDs, and depend on the performance of the underlying mutual fund scheme.
Stopping a SIP means exiting the investment
Many investors assume that if they stop their SIP contributions, they have to exit the investment entirely.
This is not true. Stopping your SIP simply means that you will no longer contribute additional funds to your investment.
The money you have already invested will continue to remain in the mutual fund scheme and will be subject to the fund’s performance.
You can choose to redeem your units at any time or let them continue to grow until you’re ready to exit.
You cannot change your SIP amount or date
Another misconception about SIPs is that you cannot change the investment amount or the investment date once you have started the SIP.
In reality, you have the flexibility to modify your SIP amount or investment date at your convenience.
Most fund houses allow you to change the SIP amount, frequency, or date by submitting a request.
However, it’s essential to check the specific terms and conditions of your mutual fund scheme to understand the process and any restrictions that may apply.
SIPs are only for equity funds
While it is true that SIPs are popularly associated with equity mutual funds, they are not limited to them.
Investors can opt for SIPs in other types of mutual funds as well, such as debt funds, hybrid funds, or even gold funds.
The choice of the mutual fund scheme should be based on your investment goals, risk tolerance, and investment horizon.
SIPs are complex and difficult to manage
Many potential investors avoid SIPs, thinking they are complicated and challenging to manage.
Contrary to this belief, SIPs are a simple and convenient way to invest in mutual funds.
You can start a SIP by filling out a few forms and setting up an auto-debit mandate with your bank.
Once the SIP is active, the predetermined amount will be automatically invested in the chosen mutual fund scheme at regular intervals.
You can track your investments easily through periodic statements provided by the fund house.
You must invest in multiple SIPs for diversification
Diversification is a crucial aspect of any investment strategy.
However, some investors mistakenly believe that they need multiple SIPs to achieve diversification.
While it’s true that having multiple SIPs can spread your risk across different mutual fund schemes, it’s essential to focus on the quality and composition of the underlying portfolio rather than the number of SIPs.
Investing in a well-diversified mutual fund scheme can help you achieve the desired diversification without the need for multiple SIPs.
