Systematic Investment Plans (SIPs) have become increasingly popular among investors since they are capable of optimizing investment returns. However, as their popularity grows, so do the misconceptions about their nature. These misconceptions are often spread by investors who have not fully understood SIPs and learned about them from others. As a result, these myths are further reinforced when investors advise others about the benefits of SIPs. This article aims to dispel the common myths about SIPs and provide you with accurate information about them.
Myth #1 : SIP is an investment product:
It is very common for novice investors to say that they are investing in SIP when asked where they are putting their money. In fact, most investors only remember the name of the asset management company in which they invest.
Reality :
It is important to realize that SIP facilitates as a method of investing in mutual funds and is not a standalone product by itself. The investment product here would be the fund of the asset management company in which the investor intends to invest. The returns an investor receives by investing in mutual funds depend on the quality and performance of the underlying fund and not just the method of investment i.e. SIP. Therefore selection of a well performing mutual fund is equally important as investment via SIP.
Myth #2 : Higher frequency of SIP provides better returns:
It is commonly believed that the more frequently you invest through SIPs, the better are the returns you can generate. Some believe that fortnightly, weekly or even daily SIPs are better than a monthly SIP.
Reality:
Research has shown that increasing the frequency of SIPs has no significant impact on returns, however it does increase the operational burden. The best way to reap the benefits of market fluctuations while keeping the administrative tasks manageable is to opt for a monthly SIP.
Myth # 3 : Complicated SIP structures offer better returns than simple SIPs:
There are now several variations of SIPs available, offering the ability to adjust investments based on certain determinants, such as reducing investment amounts in a rising market and increasing it in a falling market. Many investors find these complex SIP methods appealing.
Reality:
When investors try to time their entry and exit from the market with the help of complex SIPs mentioned above, it may result in accumulation of a smaller corpus if markets continue to rise and a greater financial burden if the markets decline for an extended period. Therefore, it is recommended to stick with simple SIPs for both ease and better returns.
Myth # 4: SIP guarantee positive returns:
A common misconception about SIPs is that since it involves rupee cost averaging whereby the unit cost of investment gets averaged, your returns will never be negative.
Reality:
Even a multi-year SIP can turn negative due to a severe market crash like the one in 2008. SIPs do not guarantee the best returns, but rather help deal with market volatility. They aim to spread out investments in mutual funds over a period of time to avoid investing at market highs. While SIP is a good method to invest in the equity markets, it still depends on the performance of the market and the chosen fund. SIPs thus reduce the risk of capital loss in mutual funds, but they do not eliminate it. If the market drops sharply after starting an SIP or continues to decline after the start of the investment, the investor will still experience a loss. Similarly, the returns of an SIP over a short period of time, especially during a bear market, can show a loss.
Myth # 5: Investing via SIPs in direct equity can give high returns:
Investing in individual stocks through SIPs may seem appealing to investors due to the potential for high returns and the benefit of averaging the cost of investment. Similarly, some experienced investors think that investing in sector or thematic funds through SIPs can generate high returns.
Reality:
There are several actors to take into consideration before assuming the above. First, it can be difficult to keep track of the relative weight of an individual stock in your portfolio if you are gradually accumulating it through SIPs. Second, investing in stocks requires close monitoring and careful evaluation to avoid potential losses. Third, unlike investing in a professionally managed mutual fund, it is the responsibility of the individual investor to regularly assess the performance of the stocks being accumulated through SIPs and ensure that they remain good investments over time. This makes SIPs an effective tool when used wisely, but they do not guarantee returns and require careful consideration of the risks involved in equity investing.
In case of investment in sector or thematic funds, timing of the investment plays a crucial role.
These funds are expected to deliver returns over a short period of 3 to 5 years, during which time a specific sector may perform exceptionally well, but eventually the market's enthusiasm for the sector could fade, leading to a meltdown and wiping out any previous gains. It may thus be better to invest a lump sum of money, rather than relying on an SIP in sector or thematic funds. However, if you do not have the conviction to make a big investment, it may be best to avoid investing in these high-risk sector funds and opt for more diversified equity funds instead.
Myth # 6: SIPs in underperforming funds can also generate good returns:
Many investors have a notion that bad mutual fund investments can be salvaged by SIPs and that they just have to remain invested in them for a long period of time to generate good returns.
Reality:
Continuously investing in a poorly performing fund through SIPs will not significantly improve your returns, even if you extend the tenure of investment. If you realize that you have made the wrong choice of asset class or fund but continue investing in a consistently poorly performing fund compared to its benchmark or category, you are incurring a significant opportunity cost. It is recommended to exit investment in the underperforming fund and invest the corpus in some other mutual fund that has demonstrated consistency in its performance over a longer period of time and has outperformed its benchmark return and performed better as compared to its peers.
Myth # 7 : It is wise to pause SIPs during market downtrends:
Some investors think that it is wise to stop their SIPs during a bear market, so as not to lose money. When the markets recover, they start investing again. This approach of timing SIPs, starting or stopping them based on market conditions is counterproductive. By doing so, the investor loses the opportunity to average out their cost by buying at a lower price during the bear market. Additionally, attempting to time the market often leads to missed opportunities and incurs opportunity costs if the market suddenly resumes its uptrend.
Reality:
Halting your SIP when the equity market is in a downward trend is a major mistake that should be avoided. To fully benefit from your SIP investment, you need to remain invested throughout the market cycles. If you keep your SIP going, you will have the opportunity to purchase more units of the mutual fund at a lower cost during a market downturn, which will boost your long-term returns. By halting your SIP, you fail to adhere to the principle of asset allocation, which involves maintaining a pre-determined level of investment in different asset classes, regardless of market conditions. Thus stopping your SIP will result in a shift of your portfolio's asset allocation away from equities and towards cash, a decision that will negatively impact your portfolio's returns. In line with the principles of asset allocation, it is actually recommended to increase investment in the equity market during downtrends.
Conclusion
One must bear in mind that SIPs are designed to discourage such behaviour by encouraging investors to invest consistently through all market phases, helping to keep emotions such as fear and greed in check. If you are investing through SIPs, discipline is the key, not timing. It is also necessary to bear in mind that simply continuing a SIP for a long time will not help build a large corpus. While SIP helps with saving, the size of the corpus will depend on the amount you contribute through SIP. It's important to keep in mind that saving is not just a ritual, but a means to achieve financial goals. You should save a meaningful amount based on your income and expenses, such as a minimum of 20 percent of your salary being a good rule of thumb. You should also consider increasing your SIP amount every year in line with increase in your annual income, as this can make a big difference in the long term to help you achieve your goal of wealth creation.
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