The term SIP stands for “Systematic Investment Plan”, which means it is a “systematic” way of investing money in Mutual Funds.
Further, under this concept, one can decide on a fixed date of every month, or quarter or even each working day, wherein the money is deducted automatically from his/ her bank account and is used to purchase the units of a mutual fund.
Also, it shall be noted that under SIP or Systematic Investment Plan, the investor has the freedom to decide on the amount of investment, date, terms and conditions, and the fund which he/ she wants to invest.
Therefore, the whole idea of investing in SIP is about automating one’s monthly investment to encourage regular saving.
Is SIP a Good Investment Option?
Yes, SIP or Systematic Investment Plan is a good option of investment and is suitable for someone with regular income. Further, SIP inculcates a habit of discipline in investment and assist investors to save without any consequences of the stock markets.
Also, this investment plan is suitable for those who want to invest in equity mutual funds for a long tenure as it takes care of market volatility to a certain extent.
Is SIP and Mutual Funds the same Investment Option?
No SIP or Systematic Investment Plan is not same as a mutual fund. Mutual Funds is an investment instrument, wherein one invests money to get returns. However, SIP is all about a disciplined approach towards investing money in Mutual Funds.
Further, it shall be noted that Mutual Funds can be of multiple kinds varying on what an investor invests into. A Mutual Funds can be equity based if an investor invests the majority section of their corpus in the recognised stock market.
Further, it can be a Debt Fund if he/ she invests the majority of their savings in debt instruments. In the same manner, there can be Global Mutal Funds, Gold Mutual Funds, Global Mutual Funds. However, it shall be noted that one can still do SIP in all these mutual funds.
10 Common Myths about SIP
The 10 Common Myths about SIP are as follows:
It is an Investment Instrument
SIP or Systematic Investment Plan in itself is not an investment instrument and is just one of the ways of investment, wherein one can easily invest a fixed amount for a pre-defined tenure in the selected mutual fund schemes.
Also, it shall be noted that the actual investment instrument is the mutual fund scheme in which one is investing in. Moreover, there is NO SIP fund as well.
Gives Positive Return in Long Run
Many projections and assumptions show that SIPs give positive results over the long run as they always take up a fixed percentage return. However, this is just a myth and stock markets do not behave in this manner.
Further, the returns can be as risky as getting split in a year to doubling or may be given complete 0 return in a year. So, it shall be noted that it is possible that one calculates SIP returns in a year than all of a sudden, the market has crashed, in that case, he/ she may have negative returns even in long-term.
Best Way to Invest
SIP or Systematic Investment Plan is suited for those people who are earning a regular income, such as salaried, while on the other hand lump sum investment is more suitable for those with irregular income, such as self-employed or when one gets lump sum money.
Also, it is always a good idea to top-up SIP or invests in lump sum at times when the market valuations are low.
Fund Selection is not Important
As we had stated in the earlier point that some investors confuse SIP (Systematic Investment Plan) as investment instrument, but the significant point is to choose the right set of funds to invest. That means if in case you choose an under performing fund for lump sum or SIP, both will result in poor returns.
Should Invest in Mutual Funds through SIPs
SIP is well suitable for equity mutual funds as it eliminates reactions while doing investment and assists to take benefit of volatility. However, in the case of the debt funds, one must invest in SIP, if he/ she can invest lump sum as there is no volatility in of the most cases.
However, if you want to invest at a regular interval, such as recurring deposit (RD) to accumulate some amount, then, in that case, SIP in debt mutual funds makes good sense.
Market is too high for SIPs
SIP is a way out to take benefit of volatility and thus, should be continued regardless of market levels. Further, one should start with SIP, only when he/ she is able to do it.
However, as mentioned earlier one must do top-up SIP with lump sum when he/ she feels market valuations are low. Also, it shall be noted that SIP in Mutual Funds makes real wealth if done over long-periods of time that, too, without interruption.
Choose Daily SIPs instead of Monthly SIPs
There are various options, such as monthly, quarterly, and now even daily SIPs are available for investment in mutual funds. However, it shall be noted that based on expert analysis, a concluded monthly SIP (Systematic Investment Plan) suits most of the investors as it matches with the cash in-flow (because of most people have regular monthly income).
Not able to make Lumpsum Investment due to SIPs
As we mentioned earlier it is a good idea to top-up SIP investment, with lump sum investment, when the market valuation is low and one have money as well. Also, one can make use of the same SIP folio number for making lump-sum investment as well.
Starting Date of SIP is used for Taxation Purpose
Each investment in SIP (Systematic Investment Plan) is considered as a fresh investment for taxation purpose.
SIP is best suited for Small Investors
Most of the people think that SIP or Systematic Investment Plan is only for small investors. Unfortunately, this is not the truth and just a myth as most of the mutual funds do not provide an upper limit for the SIP instalment. That means if in case an investor wants he/ she can start a monthly SIP of Rs 5 or 10 Lakhs. However, it shall be noted that there is a minimum amount required for SIP instalment, which usually varies between Rs. 500 to Rs. 5000 per month.
In a nutshell, Systematic Investment Plan is a “systematic” way of investing money in Mutual Funds, wherein, an investor has the freedom to decide on the amount of investment, date, terms and conditions, and the fund which he/ she wants to invest. However, it shall be noted that this investment option is suitable for someone with a regular income.
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