SIP (Systematic Investment Plan) Myths versus Reality

SIP is a method of investing a fixed sum, regularly, in a mutual fund. It is very similar to regular saving schemes like a recurring deposit.

Over the time, SIP will do rupee-cost-averaging and markedly reduce your over all entry price in the market and thus maximize your returns. This article is all about few Myths about SIPs. I will explore various myths about SIP and what is the reality?

Myth: 1 Investment in Equity Mutual funds should always be done in SIP mode -
Reality: Well, SIP is the best way to enter in the market but it doesn’t mean that every time you MUST do SIP. What if your time horizon is more than 10 years and you have Rs.5 Lakhs at present to invest? Will you start SIP for 10 years? No… In this case, you can invest lump sum Rs.5 Lakhs at single shot or may be over 2-3 years. SIP of 10 years is not necessary.

Myth: 2 I do Rupee-Cost-Averaging in Single Script – Is it SIP?
Reality: I receive this type of questions every day. People ask me that, I am regularly collecting shares of Reliance Industries on SIP Basis. Well, collecting stocks of Reliance Industries is not a bad thing. It’s India’s Best company but it is not SIP. SIP usually works in portfolios and not in Single Scripts. However, you can collect stocks of fundamentally strong companies in this manner but it’s not the SIP. SIP is for portfolios and it best works only in portfolios & not in single scripts.

Myth: 3 My SIP is continue in one Equity MF and I have surplus money. I can not invest lump sum in it.
Reality: Well, many people have a misbelieve that, if they are doing an SIP in some fund and if suddenly they have lump sum amount of money, they can’t invest this in their SIP account. Well, SIP is just a payment mode and not a scheme. You can simply Push that lump sum amount in your SIP account if your time horizon is more than 10 years.

Myth: 4 If I miss investing for a particular month, will they prosecute me?
Reality: Well, this is a fear of EMI. Well, missing SIP is not a crime…!!!! After all you have not borrowed money from anyone. In fact, you are investing your money. So even if you miss all of your SIPs, its not a crime and nobody will prosecute you because you have not borrowed money from anyone. However, it is advisable that, you don’t miss SIP for maximum returns.

Myth: 5 SIP works for everybody, but does not work for me:
Reality: Another myth. SIP works in a well-diversified equity fund in the long run. When people put forth arguments that it does not work for them, they have either not chosen a good fund or are looking at a 12 month horizon.

Myth: 6 SIP is only for small Investors
Reality: Well, this is not true. I have seen people who have literally invested lakhs of rupees via SIP every month and today their accumulated wealth in mutual funds is more than Rs.1 Crore

Myth: 7 If I do an SIP in a tax plan, can I withdraw all the money on completion of 3 years? Reality: Another regular question almost! Every installment has to be with the fund house for 3 years. The lock-in comes from the Income tax rules, which say that a tax saving scheme should have a 3-year lock-in. You cannot escape that by doing an SIP!