Does investing through Systematic Investment Plans give me guaranteed returns? Are SIPs good for investing in long-term financial goals?
These are among the several myths surrounding SIPs. They serve as a planned and disciplined way to achieve specific financial goals or gain access to the returns provided by markets through mutual funds and let you take charge of your financial planning.
BOOM busts several myths surrounding SIPs.
Myth 1: SIP tenure and amount cannot be changed
No other investment tool gives you the kind of flexibility like that of a SIP. So don't be under the pressure that the existing amount or tenure is rigid.
To the contrary, you can alter the tenure frame and the amount based on your convenience. But remember to look into the fine print. For instance, try not to reduce the tenure period near the minimum tenure period as that could attract penalties or exit loads.
Regarding amount flexibility, some funds need a minimum timeframe and SIP amount depending on the scheme. Look into these factors, terms and conditions and the documentation required when making the changes.
Myth 2: SIP is just for making small investments
While a SIP can address small financial goals such as paying for a new gadget or going on a holiday, it also has the potential of doing much more. Ideally, the power of a SIP can be exercised as a wealth-building tool.
You can build a sizable corpus — ₹5 / ₹6 / ₹10 crores through a systematic investment over an extended period through the power of compounding. That means, whether you invest ₹1000 or ₹50,000, over several years, your regular investment will earn interest, and interest will provide you with additional interest. And, if you have a higher investment amount, you will be able to earn higher interest.
But even if you cannot start with a substantial SIP amount, you can start small and keep adding to the SIP with time. A SIP also provides the flexibility of a top-up facility that allows you to increase your SIP amount and boost the growth of your investments.
Myth 3: SIPs guarantee returns
A mutual fund is a market-linked instrument, and so just like any other equity, it's bound to carry risk. That means your SIP in a mutual fund is exposed to risk and cannot guarantee you returns. But what it can do is lower the risk compared to stock market equities.
It gives you a better opportunity for capital appreciation. But if you're looking to grow wealth through your SIP, you need to ensure that you stay invested for an extended duration to offset market fluctuations.
Myth 4: SIPs are not advised in a bull market
A bull market is phase in the market cycle where prices of assets in the market are generally higher and expensive.
The best part about initiating a SIP is eliminating the worry of timing the market. So regardless of whether the market is in a bull phase or a bear phase, your SIP allows your money to work for you, especially if you stay invested for a long duration.
Here's how: Since markets are cyclical, you get to buy more units in a bear phase and fewer units in a bull phase. That means after the high, there could be a bear phase, allowing your SIP to lap up more units. And when it's back on a high, the NAV also rises, allowing your capital to appreciate. That's why you do not need to fret about investing when the market is in a bull phase. Anytime is a good time to begin investing.
Also Read: Explained: Investing In Mutual Funds To Meet Short Term Goals
This story is part of the BOOM Money explainer series on personal finance
