Top Myths About SIPs

Myth 1: SIP is only for the short term

It is the most common myth about SIP investing, especially when it comes to SIPs in equity funds. Many of us are willing to commit regular sums for investing in PPF and insurance policies, or for repaying the housing loan. But we are quite cynical about committing a regular sum in a mutual fund SIP, especially in equities. Many of us consider equity investments for short term and debt investments for long term.

In reality, it should be vice versa. Why? Simple – debt products generate good returns for you only in favorable or high interest rate cycles. However, equities generate returns when they traverse across up and down market cycles – providing you opportunities to buy cheaper in down cycles and generate wealth in up cycles. SIPs, by their very nature, help you navigate these market cycles by averaging costs.

In the short term, SIP equity returns may be negative due to temporary market corrections. But that is when your SIP is actually doing the job of cost averaging. By interrupting it, you do not allow it to work well for you. Hence, make sure you run your SIP for the long term – across at least one down market cycle and up cycle to take advantage of the market volatility.

Myth 2: SIP is for small investments

SIP means investing small sums. Hence, SIP is for the ‘small investor’ is the notion about SIPs. Even recurring deposits in banks allow you to invest small sums. Does that make it an ‘aam aadmi’ product?

SIP is meant to be a vehicle for disciplined, regular, long-term investment on an auto pilot mode. It is meant to average rupee costs and provide an opportunity for all – those with limited as well as high savings – to participate in smart investment options.

Whether you invest Rs 1,000 a month or Rs 10,000 a month, rupee cost averaging works alike for all. You buy through ups and downs using an SIP, whether you are a small retail investor or a High Net-worth Individual (HNI).

Many HNIs in fact, are known to prefer the SIP route compared with lump sum investments. Whether it is a small or big sum, by investing regularly, you will reap the benefits of SIPs in the long term.

Myth 3: I can time the market better

Well, perhaps you can. But can you do that every time? Moreover, if many people could do that, then there would not be many market opportunities in the first place. Besides, there are so many extraneous factors that always belie even the top investment gurus.

Due to multiple known and unknown factors, market fluctuates at various levels and exhibiting volatility. These market fluctuations are harder to predict by most of the investors. It is the time in the market that matters, not timing the market. Hence, if you come to terms that you cannot always time the market, you would simply run an SIP and allow your SIP to time your investments well for you. And that too, even while on an auto-pilot mode! Of course, nothing prevents you from adding to these SIPs with occasional lump sums.