SIP Investment Myths Busted: What Every Investor Must Know

THE MYTH ABOUT SIP BEING ALL-IN-ONE ANSWER

As an investor, it is quite common to find a pitch that SIPs (systematic investment plans) are a solution to all your financial problems. Not all SIPs work, and most SIPs only work in the long run. Here are some basic things you must understand about SIP before investing in these mutual fund systematic investment plans. Let us bust some popular myths!

INVEST IN A SIP AND FORGET ABOUT IT

It is quite common to hear this pitch as an investor. An SIP is not just a blind answer to all your financial questions. Firstly, the SIP has to be pegged to a goal. That means, the SIP allocation must also match with that goal. For instance, you cannot do an equity SIP for a 3 year or 5-year goal. However, an equity fund SIP would work perfectly for a 15-year or 20-year goal. Again, you cannot just invest in a SIP and forget about it. You must review the SIP on a periodic basis with your financial advisor and take appropriate action if it is not moving in sync with your goals.

IN AN EMERGENCY, I CAN FALL BACK UPON MY SIP

Investors often believe that since mutual funds are liquid and can be encashed at short notice, they work as a substitute for emergency fund. There are 2 risks to this argument. Firstly, equity fund SIPs tend to be volatile in the short run. If you start a SIP, and if the correction takes the fund 20% lower, then using it as emergency funds entails huge losses. Secondly, when you break your SIP, you are compromising your long-term goals. The way to handle your emergency fund needs is through an emergency fund that covers about 4-5 months of your income. That way, you don’t disturb your SIP.

IN A SIP, WHAT MATTERS IS THAT YOU START EARLY

While starting early is a great idea, it is also essential that you sustain the SIP for as long as possible without any interruptions. That is because, the principle of compounding works in a rather unique way. It creates most of the wealth in the later years, so the longer you sustain the SIP, the more valuable it is. For instance, a 30-year SIP of ₹10,000 a month at 13% CAGR returns grows to ₹3.76 crore at the end of 30 years. However, if you stop the SIP at the end of 28 years, your corpus is just 2.92 crore. That means; in the 30-year SIP, 22.3% of your wealth got created in the last 2 years. That is why, as long as possible, is the key.

SIPs MUST BE STARTED AT THE BOTTOM OF THE MARKET

Most investors become a victim of this myth. Which is why we find so many people stopping their SIPs at the top. In reality, in an up-trending market, lumpsum investment works better. In the long run, SIPs work because they offer more value when markets are up and more units when the markets are down. That is how rupee cost averaging works in your favour and reduces the cost of the SIP. When it comes to SIP, the timing of the start does not matter. What really matters is that you continue it for long enough.

I HAVE A SIP, SO I DO NOT NEED A FINANCIAL PLANNER

These are two different things altogether. A SIP is an instrument, not the solution. The solution is a financial plan that takes you towards your goals. A financial planner helps you in crystallizing your goals, putting a value to the goals, designing your asset allocation and in regular review of your SIP portfolio. Each of these are critical functions and best left to a professional. That is where financial planning professionals come in with their qualifications, experience and exposure to varied situations.

Next time, don’t just jump into any SIP. It is best to understand what the SIP will help you achieve and then design it accordingly.