Common Myths and Misconceptions about Systematic Investing Plan (SIP)

Systematic Investment Plan (SIP) have gained immense popularity as a disciplined and accessible way to invest in mutual funds.

However, like any financial instrument. SIPs are not immune to myths and misconceptions that may cloud investors’ judgment. In this article, we’ll clear some of the common myths surrounding SIPs to provide a clearer understanding of this investment strategy. Increase your knowledge about SIP and clear your doubts about mutual funds.

What is a Systematic Investment Plan (SIP)?

SIP helps you to invest in the disciplined manner this facility mutual fund offers you. SIP facility allows you to invest a fixed amount of money at predefined intervals in mutual fund schemes of your choice. The interval of sip can be depended on monthly, weekly, quarterly, semi-annually, and annual basics. With SIP you can plan your investments so that you can achieve your financial goals in the long term. You can do this by setting your target amount. Determine what financial goal amount is required.

Also, determine how much money you want to invest at periodic intervals to reach your target amount in mutual funds schemes. You don’t have to worry too much about stock market volatility or timing the market.

Some Benefits of SIPs

SIP offers a unique advantage called rupee cost averaging. Here’s how it works:

Investing a consistent amount over time helps you take advantage of market fluctuations. This means you can buy more units when the market is down and fewer units when it’s up. As a result, your average cost per unit decreases.

Compounding – Making Money Work for You

Regular SIP investments over the long term tap into the power of compounding. This means your money grows from the initial investment and the earnings it has made. It’s like a snowball effect, where your money multiplies itself.

This is how SIP works–

SIP focuses on consistent investments just like an FD for example you deposit a fixed amount in a bank account or earn interest at a predetermined rate. SIP also follows a similar approach to investing in mutual fund schemes. A SIP or bank account will auto-debit based on your standing instruction or the corresponding amount of mutual fund units allotted to you. The number of units you will receive depends on what is the current NAV of your mutual fund scheme.

Let’s clear the Myth and Misconception About SIP

Myth 1: SIP Guarantees Profits

Many people believe that if they invest through SIPs, they are guaranteed to make a profit.

However, this is not true. SIPs are affected by the ups and downs of the market, and the returns depend on how well the chosen mutual fund performs. While the systematic approach of SIP helps spread out the cost of units over time, it doesn’t remove the risks linked to the market. What It does is it will give you better returns with low risk for long-term returns. If you invested with the advice of financial professional, you may receive your desired corpus amount.

Myth 2: SIP is Only for Small Investors

Some think that SIPs are only for small investors with limited money. In reality, SIPs can be adjusted for investors with different financial situations. The flexibility of SIPs allows individuals to start with small amounts and increase their investment gradually as their financial situation improves. In simple terms- In SIP investors need a small amount to start their investments. This amount will increase over time and give you better returns. You don’t need any large amount that will suffer your financial freedom.

Start as low as Rs.100 rupees and make your money grow.

Myth 3: SIP is Only for Equity Investments

There’s a misconception that SIPs are designed exclusively for investing in stocks. However, SIPs can be used for various types of mutual funds, including those related to debt and a mix of both (hybrid funds). Investors can choose SIPs based on their willingness to take risks, financial goals, and how long they plan to invest. Mutual fund offers many funds from which you can choose according to your financial security. Dynamic asset allocation, Multi Asset, balanced advantage, Hybrid fund. Etc.

Give it a try to clear your every possible misconception that investors may have due to overthinking or incorrect information from other sources.

Myth 4: Timing the Market is Essential for SIP Success

The misconception is that timing the market is crucial for the success of Systematic Investment Plans (SIPs). Stems from the belief that starting a SIP during market highs is essential for maximizing returns. However, the strength of SIPs lies in their consistent and long-term approach rather than attempting to predict market highs and lows. When investors try to time the market, they may find it challenging to enter at the perfect moment, often missing out on potential gains.

The beauty of SIPs is that they promote financial discipline and continuity. By investing a fixed amount at regular intervals, investors benefit from the concept of rupee cost averaging. Rupee cost averaging is a strategy where the fixed investment amount buys more units when prices are low and fewer units when prices are high. Over time, as the market experiences fluctuations, these variations tend to balance out. The consistent investment approach shields investors from the impact of short-term market volatility.

Myth 5: SIPs are Only for Long-Term Investors
While financial experts often recommend SIPs for long-term wealth creation, investors with shorter timeframes can also utilize them. SIPs offer flexibility, allowing investors to adjust their strategy based on their financial goals and how long they plan to invest.

Myth 6: SIPs are Tax-Free
Some believe that the returns from SIPs are not subject to taxes. However, the taxation of SIP returns depends on the type of mutual fund and how long you hold your investment. Equity-oriented funds may have tax benefits after a specific holding period, while debt funds have different tax rules. Investors need to be aware of the tax implications and plan accordingly.

Conclusion