With New Year come new resolutions and new responsibilities. It is also a great time to begin a new venture or even start investing.
SIP or Systematic Investment Plan is a great method of investing. It allows an investor to invest a small amount periodically. It is a smart way to accumulate wealth over a period of time. Although SIPs are slightly safer than other investment schemes, it is surrounded by misconceptions and delusions that stop people from investing through SIP.
Here, we have busted the top 7 misconceptions about SIP.
1. It is for small-time investors only
This is one of the biggest misconceptions about SIP you can get to hear. There’s no doubt that SIP allows you to start small at as low as Rs.500 but also invest a higher amount if you are financially stable.
In fact, there is no upper limit on the investment amount when it comes to SIP. If you stay invested for a longer period you will be able to gain and save a bigger amount. However, despite all this, few people tend to see the only side of the coin and consider SIP for small-investors only.
2. SIPs are applicable to equity funds only
Well, as a matter of fact, SIPs work efficiently regardless of the fund type.Depending on your risk appetite and time you can invest in both debt fund as well as equity fund using SIP. You also invest in Hybrid funds which is nothing but the combination of debt and equity fund in varying proportions. In other words, you can invest in debt funds, equity funds and hybrid funds using SIP.
3. A low market does not favor SIP
The best part about SIP is that you can invest in it without timing the market. SIPs work on a “Rupee Cost Averaging” that allows you to invest and make fixed payments on a regular basis. It means that you can buy more funds when the market is low and less funds when the market is high.
4. SIP is not flexible
On the contrary, SIP is highly flexible. In fact, flexibility is the key assurance of SIP. Thanks to its flexibility, you can change the investment amount and the tenure if you wish to do so. However, you need to make sure that you will have to invest a minimum amount for a fund that could be either Rs.500 or Rs. 1000.
5. A heavy penalty in case of a default
Though an investor needs to inform the AMC before stopping SIP, there is no rule which charges an investor with a fine or penalty. The AMC cannot levy any fee in case of defaulting a monthly, quarterly or yearly SIP amount.
6. Guaranteed returns
This is a common misconception among people that SIP ensure guaranteed returns by eliminating losses and risks. Although Rupee Cost Averaging works to minimize risks, it does not completely negate risks and related losses. Investing in SIP for a longer duration will only average out the risk but does not guarantee returns.
7. SIP mutual fund and Lump-sum mutual funds are different
SIP and lump-sum are two sides of the same coin. They are just two methods of investing money in a particular mutual fund. Depending on your risk appetite and income, you can either opt to invest a lump-sum amount or SIP.
Misconceptions are bound to occur if your knowledge about a subject is less or you believe in people who simply advise others. You can always consult an experienced financial advisor and clear your doubts before investing.