Systematic Investment Plans (SIPs) are growing in popularity among retail investors because they provide a cost-effective and structured way to build wealth. Despite these advantages, several fallacies about SIP deter investors from using this style of investing. This article will bust some of the most widespread fallacies around SIP to enable you to take full advantage of the mutual fund market. But before that, let’s understand what SIP is and how it works.
What is SIP?
A Systematic Investment Plan (SIP) is a tool provided by mutual funds to help investors make disciplined investments. An investor can make fixed investments in the mutual fund scheme of their choice at regular intervals using the SIP option. The amount of money can be as little as Rs. 500, and the predetermined SIP intervals could be weekly, monthly, quarterly, semi-annually, or annually. An investor who chooses the SIP method of investing can do so in a time-bound manner without worrying about the market’s current position. All thanks to average costs and the power of compounding.
Understand the working of a SIP
You can invest in any sort of mutual fund through SIPs, which supports your long-term wealth creation. In this context, generating profits and building wealth are not synonymous. You can only earn returns by investing in fixed deposits. But you can invest in SIP mutual funds in order to build money.
Let’s say you automate a monthly SIP where you invest a set amount on the fifth of each month. Therefore, this sum will be automatically debited from your bank account on the fifth of every month to invest in your choice’s mutual fund.
Common Myths about SIPs
Myth 1: SIP is only for small Investments
The Reality: Systematic Investment Plan (SIP) is only appropriate for small investments is an absolutely false statement. SIP investing is not just for little sums. SIP can be utilized to invest any amount, up to and including Rs. 500. Because SIP uses rupee cost averaging, investors can invest any amount. For instance, based on convenience and investing strategy, an investor may invest Rs. 500 or Rs. 1000.
Myth 2: SIPs cannot be discontinued
The Reality: Markets are smashing records, and the popularity of the SIP mechanism for mutual funds. Staying invested is the best you can do. But keep an eye on your SIP’s performance and avoid becoming complacent. You may consider investing in a different fund if the performance is subpar.
The fund house does not charge fees if you decide to stop a SIP in a fund that is not performing well. Additionally, you could quit your regular SIP amount while staying invested (without redemption). You can always transfer your assets to another fund.
Myth 3: You cannot change the Tenure or Amount of your SIP
The Reality: The majority of investors who use SIP to make investments believe that the term and amount cannot be changed. As a result, the investor comes under stress, which the SIPs should not give. This is because SIP is the most adaptable investment method. If a few conditions are met, an investor may change the tenure period and the amount as desired. For instance, to prevent exit loads or fines, the tenure length shouldn’t be cut anywhere close to the minimal tenure period.
Additionally, depending on the program, a few funds require a minimum tenure and quantity for a SIP plan. You can find this in the terms and conditions when working on the documentation. Additionally, altering the SIP duration and amount is not a difficult thing to do. Just the documentation work needs to be done.