A systematic investment plan (SIP) is a plan in which investors make regular and equal payments into a mutual fund, trading account or retirement account. An SIP allows you to invest a certain amount at a regular interval (weekly, monthly, quarterly). In essence, it is a planned way of saving and building wealth, and this aspect has made it popular among many investors. However, there are some myths associated with SIPs, which can be misleading. Here’s a look at what they are and how to avoid them.
Stop The SIP When The Stock Market Corrects
Many investors either pause or stop their SIPs whenever the stock market corrects. But this is the opposite of what investors should do.
One of the biggest advantages of SIPs is that they average out the cost of investment by buying units at high and low prices. In a consolidating market, where the share prices are falling, you get a chance to invest at a lower cost, which helps bring down the average cost of buying. “Falling markets are a good opportunity to invest and add more from a portfolio perspective. Continue with your SIPs even when the stock market goes through a tough phase,” says Harshad Chetanwala, co-founder, MyWealthGrowth.com, an online mutual fund investment platform.
When the markets are down, you may think that by stopping your SIP you are protecting your money from further loss. But what you are actually doing is losing out on the opportunity to buy more units at the same cost.
Investing Daily Instead Of Monthly For Better Returns
There are investors who believe that to take full advantage of cost averaging, it is better to go for daily SIPs so that the investment is spread across every day instead of once a month. However, when you evaluate the difference in returns for monthly and daily SIPs, there is not much difference. “From the overall investment perspective, you can opt for monthly investment as this too may give you sufficient opportunity to spread your investments. You need not try to overdo things with daily SIPs,” says Chetanwala.
SIP Can Only Be Done In Equity Funds
This is a common misunderstanding that SIPs can only be done in equity mutual fund. SIP is actually a concept that allows investors to channelise their savings based on their financial goals. “If the investor’s goal is short-term, then SIP in debt /short-term funds can be planned. Similarly, if the goal is for a medium-term, then SIP in an asset allocation/hybrid product can be planned. For long-term financial goals, SIPs in equity funds are recommended to benefit from compounding and rupee cost averaging,” says Tarun Birani, founder and CEO, TBNG Capital Advisors, a Sebi-registered investment adviser and wealth management firm.
SIP Should Be Planned Based On Bull Or Bear Market
The biggest advantage of an SIP is that it need not be planned based on any market level, be it in a bull or a bear market. SIP should be planned as a disciplined activity to ensure regular savings that are channelised. “Whether it’s a bull phase or a bear phase, SIPs do their work when invested for longer durations,” adds Birani. In fact, SIPs fee the investor from timing the market.
SIP Is A Product
Many investors think SIP is a product in itself. SIP is not an investment product but an investment facility that allows investors to make regular investments. It is a style of investing or a concept. You can follow this style of investing in various financial products.