Demystifying mutual fund SIPs

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Demystifying mutual fund SIPs

Over a long-term period, investments in equity have offered returns which far surpassed gains from the debt instruments and real estate. It is considered as the only investment tool, which helps investors create significant wealth. However, the problem is equities display sharp volatilities, which at times lead to big losses in short-term. Also, investment in equities demands investors to remain updated with the market. In such a case, how do investors make money? The reply to this most asked question is as simple as a straight line – ‘Investment in SIP.

What is a SIP?

SIP, when explained in a very simple language, refers to a process of investing a fixed amount, periodically, in a mutual fund scheme. Better known as Systematic Investment Plan, SIP enables investors to purchase units on a specified date each month. The biggest benefit of SIP investment is that it prevents you from thinking about timing the market. Often, in timing the market, investors miss the rally and refrain from investing when markets are doing well, or investors tend to enter at a time when valuations have peaked, and the market is on the verge of declining. Therefore, investing through SIP will ensure that investors capitalize on the presented opportunity that otherwise is tough to identify in advance. It would be important to note at this stage that SIPs DO NOT REDUCE RISK. They only make the investment process easier.

How To Invest in SIPs?

People can invest a pre-determined fixed sum in mutual scheme monthly or quarterly, depending on their convenience through ECS facility or post-dated cheques. They need to submit an SIP mandate form as well as an Application form wherein they mention all necessary details, like the amount to be invested and the SIP date. All the documents can be submitted to the Investor ServiceCentre/Mutual Fund Centre or at the service centre of the Registrar and Transfer Agent.

Don’t Be Fooled By SIP Myths

Although SIP is an excellent way to make some real money from equity markets, it is first important for investors to free their mind from some of the most prevalent SIP myths in the market. It will help investors to take a well-informed decision and plan their investments following a rational approach. So, let us take out some time and focus on the buzzing SIP myths in the market:


Myth – SIP is Small Investors Plan

Don’t confuse SIP with Small Investors Plan. Undoubtedly the abbreviation is SIP, but it refers to Systematic Investment Plan’, which is equally a good investment tool for big investors. It helps people to get into the habit of disciplined and long-term investments, irrespective of the amount they want to invest. Whatever be the SIP amount, the advantage of rupee cost averaging will result in profits for everyone.

Myth – Investing in stock and investing in SIP yields same results

Some investors argue that they can get benefits of rupee cost averaging from equity investment, then why there is a need to invest in SIP? The argument is partially rational as rupee cost averaging happens in equity investment too. But what don’t occur in equity investment and is seen in SIP investment is mitigation of risk through diversification. SIP helps in reducing the stock-specific risks commonly seen in direct equity investment. In addition, investors can advantageously structure their portfolio based on various parameters including risk appetite, value, growth, market cap and others.

Myth – SIP is all about small investments

The belief that a lump sum investment is not an SIP way is a myth. As earlier said, SIP is a risk- diversification investment tool, and therefore investing a big amount in an SIP mutual scheme is possible. In case, an investor has an SIP of Rs 5,000 per month with a ten-year horizon, and suddenly he has surplus funds of Rs 50,000, then he can pump that amount to its ongoing SIP of Rs 5,000.

Myth – SIP is wrong investment choice when markets are bullish

The whole point of the SIP is that investors should not think about the markets being bullish or bearish when investing as it does not add value. It is highly unlikely that you can time the markets and therefore SIP just brings in the discipline to keep investing irrespective of the market levels and the point is that over time due to periodic investing you end up averaging out the highs aand the lows. Here, it is vital to mention that SIP investment is not about timing the market; instead, it is more about investing periodically to benefit from the power of compounding and rupee cost averaging.

Myth – Smart Investors have an edge over other investors

Perhaps, there are times, when smart investors who know a few tricks manages to fetch good profits from SIPs in short-term. The question is not if they earn profit sometimes, but the question is how long they can go with such plan of investment. Numerous extraneous factors affect equity movement, and in such a big way that even seasoned experts fail to time market. So, it is better to stay away from that trap and become smart by running an SIP on an auto-pilot mode.

Myth – Bear the penalty for missing SIP date

Well, the question is what is the myth all about? Investors are not missing their equated monthly installments, but they are missing on SIP, which in no way is a type of credit product. Even if they miss their SIP payment one time for some or other reason, they don’t have to pay the penalty. The missed payment can be paid along with the next planned SIP amount. Remember, SIP is not EMI, and also EMI is not SIP. Understand the difference!!

Myth – Investors can withdraw entire money from tax saver SIP after three years

In SIP, investors make periodic investments, and therefore the investment made in the second year will only complete two years at the end of 3-years. In such a scenario, the lock-in period criteria, as per the Income Tax guidelines is not met. Therefore, investors cannot withdraw the amount from tax-free SIP until the time other installments also complete 3-years in full.

Overall my view is that SIPs are good for discipline but it binds you down to the payment schedule. If you can maintain the discipline yourself it would be better to just make some investments every month. You can use the Wixifi system to save time picking the right funds and just make small monthly investments for the long run.


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