Systematic Investment Plans (SIP) is a popular mode of investment, which inculcates the habit of regular investment among investors and helps in gradual wealth building. Whether, you wish to invest a small amount or a comparative larger fund, SIPs are a great choice for investors.
However, there are some misconceptions about SIPs which every investor should know about before planning for their SIP investments.
SIPs and Mutual Funds Are the Same Thing
SIP is a way of investing in mutual funds. It is a fixed monthly small investment. If your do not have a lump sum amount to invest in mutual funds, or do not wish to do so, you can keep investing in bits through SIPs. The money goes for investment in the mutual funds of your choice. You may choose to invest in equity funds or debt funds of your choice.
SIPs Have No Risk Factors
This depends on the type of SIP you choose to invest your money in. If you are adventurous and can take the step of risking your returns, you may invest in small and mid-cap mutual funds. The large cap mutual funds usually have lower risks. Also risk factor depends on the type of your investment. You can usually expect better returns from debt mutual funds at a low risk. While equity mutual funds are known to be high risk investments.
SIPs Are Best As Short Term Investments
Investors go wrong when it comes to deciding on the tenure of their investments. Many investors think that equity investments are best as short term investments and debt investments can run for long term. But the reality is that debt investments can fetch good returns only when interest rates are high, whereas equity investments can fetch you good returns even when the market hovers between high and low peaks.
SIP Returns Are Non-Taxable
Many investors are under the myth that earnings from SIP investments are completely non-taxable. The truth is that if returns from equity mutual funds are redeemed before the completion of one year, the returns will attract a tax of 15%. However, after the completion of one year, the returns become non-taxable. The returns from debt mutual funds, when redeemed before completion of 3 years, will fall into your income tax slab. If you redeem them after the completion of 3 years, you still have to pay a tax of 20%.
Capital Is Completely Guaranteed In SIPs
You can invest in assets like equity mutual fund or debt mutual fund or a combination of both. But if the market is at a high during your investment and then there is a steep market fall, your capital will suffer loss eventually. It has been noted that if SIPs continue for a term of 4 years or more, only then your capital stands the chance of not being at any loss.
Investors Can Increase Or Reduce The SIP Amount Easily Whenever They Want
SIPs do not usually allow investors to increase or reduce the amount of their monthly investment. If you have extra money which you want to add to your existing SIPs, chances are you will have to go through very complicated procedures. Investors are rather advised to make a new SIP with the increased amount. But again, there have been cases when SIPs have stopped accepting new investments. Also, if you have cancelled your existing SIP expecting to make a new one, which for some reason has not been accepted, you are not eligible to start a new SIP in the same mutual fund anymore. However, you can make a new SIP in some other mutual fund of your choice with the new increased or reduced amount.
SIPs Have No Lock In Periods
While this myth is true in case of open-ended mutual fund investments, but it is completely untrue in case of close-ended mutual fund investments. Mutual funds like ELSS have a lock-in period of 3 years.
SIP Investments Are Always Monthly
While most of the investors are under the myth that SIP investments can be done only on a monthly basis, the reality is that the investor can actually choose the fixed interval of his investments, which can be weekly, monthly, quarterly and so on. So, based on the interval that the investor wishes to channelize his funds into investments, he can choose his SIP investment accordingly.
SIP Returns Are Fixed
The returns you receive from your SIP investments depend on the mutual funds where your money is invested in. Unlike regular bank investments, the SIP returns are not fixed. SIPs can fetch you better and higher returns from regular bank investments, provided you invest in low risk and higher yield funds. Debt funds are usually considered low risk funds and are known to fetch better returns on your investment.