Systematic Investment Plans (SIPs) have become increasingly popular among investors for their disciplined and hassle-free approach to investing in mutual funds. However, with popularity comes a fair share of myths and misconceptions surrounding SIP investments. In this article, we aim to debunk some of the common SIP myths and shed light on the facts to help investors make well-informed decisions.
Myth 1: SIP Guarantees High Returns
Fact: SIPs do not guarantee high returns. Like all investments, SIPs are subject to market risks, and the returns depend on the performance of the underlying mutual fund or exchange-traded fund (ETF). While SIPs may benefit from rupee cost averaging, which can smoothen market volatility, they cannot shield investors from market downturns or guarantee exceptional returns.
Myth 2: SIP is Only for Equity Investments
Fact: While SIPs are widely associated with equity investments, they can be used to invest in various asset classes. Investors can opt for SIPs in debt funds, hybrid funds, and even index funds. The choice of fund should align with the investor’s risk tolerance and financial goals.
Myth 3: SIP is Suitable Only for Short-Term Goals
Fact: SIPs are often recommended for long-term goals, such as retirement planning or building a corpus for your child’s education. While SIPs can be used for short-term goals as well, the power of compounding and rupee cost averaging is best realized over an extended investment horizon.
Myth 4: SIPs Require Constant Monitoring
Fact: One of the benefits of SIPs is that they require minimal monitoring. Once you have set up your SIP, the investments are made automatically at regular intervals. However, periodic reviews of your investment performance and the fund’s progress are essential to ensure they align with your financial goals.
Myth 5: Stopping SIP in a Down Market is a Wise Decision
Fact: In a down market, stopping SIPs might seem like a prudent move to avoid further losses. However, stopping SIPs interrupts the rupee cost averaging process, and investors may miss out on the potential benefit of buying more units at lower prices. Instead, staying invested in SIPs during market downturns can allow investors to take advantage of the market recovery.
Myth 6: SIP is Only for Small Investors
Fact: SIPs are designed to be accessible to investors with varying budget sizes. While SIPs offer an affordable entry point for small investors, there is no restriction on the amount an investor can invest through SIPs. Even investors with substantial funds can use SIPs as part of their investment strategy.
Myth 7: SIPs are Complex and Difficult to Start
Fact: On the contrary, SIPs are simple and straightforward to start. Investors can initiate SIPs through various online platforms or directly through mutual fund companies. With minimal documentation, investors can set up their SIPs in a matter of minutes.
Myth 8: SIP is a Tax-Efficient Investment
Fact: The tax efficiency of SIPs depends on the type of mutual fund chosen. Equity-oriented SIPs held for more than one year are subject to long-term capital gains tax of 10% on gains exceeding Rs. 1 lakh, whereas debt-oriented SIPs held for more than three years are taxed at 20% with indexation benefits. Short-term capital gains tax applies for holding periods below these thresholds.