SIP Myths to avoid while investing in Mutual Funds

SIPs or systematic investment plans of mutual funds have been the hands down champs in Indian financial markets, for both solid performance as well as growing investor interest in them. 

SIPs enforce disciplined and regular asset allocation to an asset class, whose volatile behaviour gets evened out by the steady flow, helping investors to create wealth through the ups and downs of the market. Despite its growing popularity, there are certain myths around SIPs that can make investors get the wrong end of the stick. 

Here is some bit of myth busting: 

Myth: SIP in any equity mutual fund will do 

Fact: Given the sharp rise in inflows through SIPs in recent months, investors need to understand that investing in any mutual fund may not lead to automatic wealth creation. If you map 10-year SIP returns of various equity funds, you may find up to 8 per cent difference in annualised returns among some of them. Choosing the right set of diversified funds with an eye on the long-term performance track record is critical

The power of compounding cuts both ways; a bad choice can result in large difference in end returns

Myth: Markets are too high to start or continue an SIP 

Fact: Time is investor's best friend in the stock market, goes the saying. Studies have shown that time spent in the market is far more profitable than timing the market. SIPs shield investors from periods of wild market swings and save investors from the futility of timing the market. 

Secondly, in a weak market, one ends up accumulating more units of a security through the SIP mode of investment, which then results in lower average purchase cost. 

Markets have their ups and downs. Market experts say there was a period in 2013 when a number of investors did not renew their SIPs, as returns for the immediate prior years were negative or low. Those who kept the faith on them were rewarded in the subsequent years. 

Investors will be better off if they don't allow market fluctuations to affect their decision to invest in or continue with an SIP. Anytime is good time to do it! 

Myth: If you agree to a SIP amount every month, you can never change it 

Fact: If you decide to invest Rs 3,500 a month through an SIP and want to change it to Rs 7,000 next month or Rs 2,000 next month, there is total flexibility for you to do so. There is no charge for changing the SIP amount.

Myth:There is penalty if SIP is stopped in between 

Fact : One can continue or stop a mutual fund SIP at one’s own convenience. One just needs to provide a duly signed written request. There is no penalty whatsoever, or charge for stopping an SIP.