5 SIP Myths Busted: Get the Facts for Smart Investing

Systematic Investment Plans (SIPs) are powerful investment tools. They have revolutionized the way Indians approach mutual fund investments. However, this widespread adoption has also given rise to numerous misconceptions and myths that may deter investors.

In this article, we debunk five of the most prevalent myths surrounding SIPs. You will get accurate facts about SIPs that help you make informed investment decisions.

• Table of contents

1. Myth 1: SIP is a type of investment product
2. Myth 2: SIPs only meant for smaller investments
3. Myth 3: You can only invest in equity funds through SIP
4. Myth 4: You cannot withdraw SIP whenever you want
5. Myth 5: SIPs have longer lock-in periods

Myth 1: SIP is a type of investment product

Many investors often mistakenly assume Systematic Investment Plans (SIPs) as standalone investment products. In reality, a SIP is not a product itself but a convenient and disciplined method of investing in mutual funds.

It's a way to automate regular investments, much like a recurring deposit, where a predetermined amount is deducted from your linked bank account at specified intervals (monthly, quarterly, etc.) and invested in your chosen mutual fund scheme.

It's important to understand that SIPs don't guarantee specific returns or represent a separate asset class. The returns you earn through an SIP depend entirely on the performance of the underlying mutual fund scheme you've selected. When considering a SIP, you should focus on choosing a suitable mutual fund scheme based on your investment goals and risk tolerance, rather than viewing SIP as a product in itself. You can also use an SIP calculator to assist with the planning process. Based on your SIP amount, investment horizon and expected returns, the calculator shows you what your final corpus can potentially be.

Financial advisors frequently encounter questions like ‘Which is the best SIP?’ or ‘What returns will an SIP give?’. These questions highlight the common misconception that SIPs are standalone products with inherent returns. Instead, investors need to understand that SIPs are merely a facilitated investment method to simplify and automate the investment process.

When registering for an SIP, it's crucial to link it to a specific mutual fund scheme and choose the desired investment frequency. Once set up, the specified amount will be automatically deducted from your bank account and invested in the chosen mutual fund, ensuring consistent and disciplined investing without manual intervention.

Myth 2: SIPs only meant for smaller investments

It's true that SIPs allow you to start investing with a modest amount, such as Rs. 500 or Rs. 1,000 per month. But this doesn't mean they are exclusively for small investors.

In reality, there's no upper limit on the SIP amount you can invest. Many mutual funds allow you to invest as much as you want through SIPs. In fact, high-net-worth individuals (HNIs) often utilize SIPs as a disciplined and strategic approach to invest large sums of money over time.

SIPs benefit investors of all sizes by enabling them to buy more units when the market is down and fewer units when it's up, thus averaging out the purchase cost. This rupee-cost averaging principle works irrespective of the SIP amount. So, whether you're investing Rs. 1,000 or Rs. 10,000 per month, you still benefit from the market's fluctuations. A variant of the regular SIP is the step up SIP, where your contributions increase by a fixed percentage periodically. You can use a step up calculator to see the growth potential of such an approach.

Myth 3: You can only invest in equity funds through SIP

Many think Systematic Investment Plans (SIPs) are solely designed for equity funds. This is not true. While SIPs are widely associated with equity investments, they are equally applicable and beneficial for debt funds as well.

Investing in debt funds through SIPs is akin to establishing a recurring deposit (RD) with a bank, but with the added advantage of potentially higher returns. Debt funds generally offer relatively better stability and lower volatility compared to equity funds, making them suitable for conservative investors or those with short-term financial goals.

Moreover, the Securities and Exchange Board of India (SEBI) permits mutual funds to offer a diverse range of both equity and debt schemes. Within the debt fund category, investors can choose from various options like gilt funds, duration funds, and credit risk funds, each with varying risk profiles and return potentials.

Even for non-equity funds where volatility is less of a concern, SIPs prove advantageous for many investors. They instil financial discipline, preventing impulsive spending and encouraging regular savings.

Myth 4: You cannot withdraw SIP whenever you want

There's a common misconception that once you start a Systematic Investment Plan (SIP), you're locked into it and cannot access your invested amount until a specific period ends. This is not entirely accurate.

While some funds, like Equity Linked Savings Schemes (ELSS), have a mandatory lock-in period (3 years in the case of ELSS), most open-ended mutual funds allow you to withdraw your invested amount at any time, even if you have an ongoing SIP.

Withdrawing from a SIP:

• Stopping Future Investments: You can discontinue your SIP at any time without incurring any additional charges. This simply means that future installments will not be deducted from your bank account and invested in the fund.
• Redeeming existing units: You can also redeem (sell) the units you have already accumulated through your SIP. The redemption amount will depend on the current Net Asset Value (NAV) of the fund and any applicable exit loads.

Important considerations:

• Lock-in period: If your SIP is in a fund with a lock-in period, you cannot redeem your units before that period expires.
• Exit load: Some funds may have an exit load, which is a fee charged for redeeming units before a specified period.
• Tax implications: Redeeming units may trigger capital gains tax, depending on the holding period and type of fund.

The flexibility of SIPs:

The beauty of SIPs lies in their flexibility. You can choose to:

 

• Discontinue the SIP: Stop further investments if you need to pause or adjust your financial strategy.
• Redeem partially or fully: Withdraw a portion or all of your invested amount based on your financial needs.
• Switch to a different fund: If your investment goals or risk tolerance changes, you can switch your SIP to another fund offered by the same AMC.

Myth 5: SIPs have longer lock-in periods

You may have heard SIPs are subject to lock-in periods, restricting access to your invested funds. This is a myth. SIPs themselves do not have lock-in periods; they are merely a method of investing in mutual funds.

However, the mutual funds you invest in through SIPs might have lock-in periods. For instance, Equity Linked Savings Schemes (ELSS) have a mandatory lock-in period of three years. This means you cannot redeem your ELSS investments for three years from the date of purchase.

Other tax-saving instruments like the Public Provident Fund (PPF) and National Savings Certificate (NSC) have lock-in periods of 15 years and 5 years, respectively. In contrast, 5-year tax-saving fixed deposits also have a 5-year lock-in period.

It's crucial to distinguish between the SIP, which is an investment method, and the underlying mutual fund, which may have its own lock-in period. Understanding this distinction will help you make informed investment decisions and avoid any misconceptions about the accessibility of your funds.

FAQs:

Is SIP stable for investment?

The stability of a SIP depends on the underlying mutual fund you choose. SIPs in equity funds carry market risk, while those in debt funds are generally considered less risky. It's crucial to select funds that align with your risk tolerance and investment goals. However, SIPs themselves are simply a method of investing and don't inherently add or reduce risk.

Can I withdraw SIP anytime?

You can typically withdraw your SIP investments from open-ended mutual funds anytime after the lock-in period (if applicable). However, early withdrawals may attract exit loads. If you wish to stop future SIP installments, you can do so without penalty.

What is the lock-in period for SIP?

SIPs themselves don't have lock-in periods. However, some mutual funds, like ELSS (tax-saving funds), have a mandatory lock-in period of three years. For other open-ended funds, there's no lock-in, but early withdrawals may incur exit loads.

Is SIP better than FD?

SIPs in equity funds have the potential to offer higher returns than FDs over the long term. However, they also carry higher risks. SIPs in debt funds may offer comparable or slightly higher returns than FDs, with potentially lower risk. The choice between SIPs and FDs depends on your risk appetite, investment goals, and time horizon.

How is SIP beneficial to investors?

SIPs offer several benefits:

• Rupee-cost averaging: By investing regularly, you buy more units when prices are low and fewer units when prices are high, averaging out your purchase cost over time.
• Disciplined investing: SIPs automate your investments, fostering financial discipline and helping you invest consistently without timing the market.
• Compounding: Over the long term, the power of compounding can significantly enhance your returns as you earn returns on your returns.
• Flexibility: You can start with small amounts and increase or decrease your SIP amount as per your financial situation.
• Accessibility: SIPs are available across various mutual fund categories, offering a wide range of options to suit different investment needs.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.