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18 June, 2024 15:10 IST
Financial Planning
Demystifying Misconceptions about Mutual Fund SIPs
Source: IRIS (11-JAN-16)

Investment Truth Vs Investment illusion:

In today's world surrounded with an abundance of information, it is common for every one of us to form their own set of perceptions and beliefs. This may be quite a times a good thing to do (i.e. follow your own intuitions), however it also very important to realize that whether what you believe is the hard truth, or just our mere illusion.

Today, one may find an exposure to a plethora of information in the investment world, too. Consider the example of a discussion over the stock markets, happening in a social gathering. Here, you may hear people talk about the investment sectors, the mutual funds to consider, or even the investment avenues to choose for deploying their money.

We do understand that everyone has their own viewpoint over these sensitive matters. However, to ensure your financial health, it is important you carry out sufficient research. Doing this will thereby enable you take wise investment decisions, matching your investment goals. Sharing of inappropriate information by friends or brokers, may guide you on the wrong path and restrict your ability to comprehend things in the right prospect.

Misconceptions about Mutual Fund SIPs:

You may find numerous views on the market’s outlook pertaining to the current situation of instability. Additionally, one may also be aware that Mutual Fund SIPs (Systematic Investments Plan) can help you manage the unpredictability in the market. However, you must also be aware of some of the very common myths that you can experience while investing in the Mutual Fund SIPs. Let us get to know about these myths and the facts lying behind the same.

1. Mutual Fund SIPs are for the small investors:

It is a complete delusion that Mutual Fund SIPs are only for the small investors. One must get over this myth that Mutual Fund SIPs are not Small Investor Plan, but Systematic Investment Plan.

Mutual Fund SIP is just a strategy which can reduce risk. If it reduces risk for a 1000 Rs monthly installment, it can do the same for Rs 1 lac monthly installment.

Even HNIs and Super HNIs can invest in Mutual Fund SIPs.

2. Doing a rupee cost averaging in a single equity ��" is that also a kind of SIP or not?

No, this again is a myth. You cannot equate rupee cost averaging in single scrip, to a Mutual Fund SIP. When the markets bring down the price of single scrip, it is providing you the information at which you might need to react. Investment into the Mutual Fund SIPs, with a diversification of Mutual Funds, can help reduce the market risks specific to stock (direct equity) exposure.

3. There is a difference between SIP and lump sum mutual fund schemes:

The fact remains that SIP investments have no special mutual fund schemes. Rather, SIPs are just an investment mode.

For example, if you are willing to give your funds for 10 years, and that too in a lump sum, you can skip going for SIP. However, if your investment horizon is for 5 years or so, then SIP is a must-do. Always remember, SIP is not a scheme, but just a mode of payment.

4. One cannot invest lump sum in a scheme with a Mutual Fund SIP account:

This is another myth associated with Mutual Fund SIPs. Rather, investment of lump sum amount is possible into a mutual fund where a SIP exists. For example, you have an ongoing Mutual Fund SIP of Rs. 5000 in a Mutual Fund scheme and if you have an excess of some Rs. 50, 000 to invest then you can pump the lump sum amount to the continuing SIP account.

5. Penalizing on missing one/two SIP dates:

This is another fear that people have for their SIP monthly installments. Remember, with a mutual fund SIP you are buying an investment scheme every month/quarter, so there is not any question of penalty charged in case you miss the installment. As per disciplinary matters, one should never miss his monthly installments.

However, even if one does, he/she is not committing a crime. In that case, the Mutual Fund SIP account will remain active, and the SIPs in future will debit subject to your bank balance. It is not like the case of your loan EMI or insurance premium, where there is a penalty on missing an installment.

6. Do an SIP during the accumulation stage of your life (when you have plenty), and do a SWP during retirement:

Ideally, one should keep his withdrawals only from an income fund or a bank FD. Adopting this financial strategy of acquiring through SIPs and liquidating through SWPs, may put into an even more risky situation during your retirement.

As one nears his/her retirement, the risk appetite reduces due to the lessening years of his/her earning life. Therefore, keeping your savings in equity mutual funds in the retirement years can be a risky option.

Transferring your savings from a high-risk asset class (like equity) to a low risk asset class (like debt and cash), could help you maintain a healthy lifestyle post-retirement.

7. Markets at very high levels to start a Mutual Fund SIP:

Buying low is better than buying high. One must remember this one thing, while looking for the right time to start an SIP. This will also help one gain from upside in the future. Unnecessarily, one should not try to time the markets, as that is always not possible. One should also remember that SIPs help one better manage the market fluctuations.

8. For a tax-saver SIP, can I withdraw all money on completing the lock-in tenure?

Each installment has to present with fund house for at least three years. It is a sure myth to believe that one can withdraw his entire money once his lock-in period of three years is over. Whereas, the fact remains that for you to be in a position to withdraw, every installment of your SIP should complete the lock-in period. For example, if the lock period of one installment is 3 years, then all the other installments should also need to complete three years before you can withdraw.

SIPs bring discipline into the whole investment scenario, and its transactional decisions are solely at your free will. Therefore, one must be free from such above-mentioned myths that surround us while taking well-informed decisions related to SIP investments.

(Ramalingam. K an MBA (Finance) and certified financial planner. He is the director & chief financial planner of holistic investment planners)

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