Are you looking for a disciplined way of investing in mutual funds? Do you want to put money in equity funds without timing the stock market? You can consider investing in mutual funds through the systematic investment plan or the SIP. It is a facility offered by mutual funds where you can invest a fixed amount regularly in a mutual fund scheme. You may invest in mutual funds through the SIP if you are a beginner in mutual funds. However, you may consider these five common SIP myths before investing your money in mutual funds.
1. SIP is suitable only for small investors
You may believe that SIP helps you put small amounts of money regularly in a mutual fund scheme. It is a myth as you can invest in mutual funds through SIP with any amount. You may consider investing Rs one lakh or more through the SIP in a mutual fund of your choice.
However, you will have to invest a minimum amount of Rs 500 per SIP instalment. You may consider putting a large amount in mutual funds through SIP if you want to achieve your financial goals faster.
2. SIP is an investment product
You may find many people believing SIP to be an investment product by itself. However, SIP is a facility offered by mutual funds and not an investment product. In simple terms, you invest through a SIP and not ‘in’ a SIP.
You can pick the right mutual fund to achieve your investment objectives depending on your risk tolerance. You must invest in equity funds through the SIP to avoid timing the stock market. However, though the SIP route is the best way of investing in equity funds, you will have to select the right mutual fund scheme to maximise your returns.
3. Opt for frequent SIPs
You will find the SIP helping you invest systematically in a mutual fund scheme. However, many investors believe that frequently investing through daily, weekly or fortnightly SIPs may offer higher returns than monthly SIPs.
You have studies showing the frequency of SIPs having no impact on the returns. In simple terms, the difference in return between weekly and monthly SIPs is negligible over some time.
You may consider picking SIP dates for mutual funds at your convenience. You could choose monthly SIPs over weekly SIPs as you may get a fixed salary every month. It is easy to monitor your investment, and you may select SIP dates close to your payday.
4. Invest the same SIP amount for many years
It is common to believe that investing the same SIP amount for the long-term can help you achieve your financial goals. However, you must increase your SIP amount periodically if you seek to realise your investment objectives.
You may get a salary increment every year. Your mutual fund SIPs must keep pace with salary hikes. You can consider stepping-up SIPs to match the rise in income.
You can put money in mutual funds through step-up SIPs, also called top-up SIPs. It helps you increase your SIP contributions by a predetermined fixed percentage or amount at periodic intervals to attain your financial goals. For example, you could opt for a step-up SIP to increase your contribution by 10% every year.
5. Stop your SIPs when the stock market crashes
You put money in mutual funds through the SIP to avoid timing the stock market. It is an excellent method of investing in equity funds to buy more units when the market is falling and lesser units when stock markets rise.
It is a common myth that you must stop SIPs in a bear market. However, you will lose an opportunity to average your investment cost if you stop SIPs when stock markets crash. You can equate stopping SIPs in a bear phase as timing the stock market. It defeats the purpose of putting money in mutual funds through SIP.
You must avoid falling prey to SIP myths if you want to maximise the return from equity funds. You may invest in mutual funds through SIP anytime to achieve your financial goals. It helps you put money in equity funds across all market levels to average your investment cost. In a nutshell, you must focus on selecting the right mutual fund and invest through the SIP to achieve your investment objectives.
For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in
I write to make complicated financial topics, simple. Writing is my passion and I believe if you find the right words, it’s simple.
