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SIPs or systematic investment plans of mutual funds have been the hands down winners in Indian financial markets, for both solid performance as well as swelling investor interest in them.
SIPs enforce disciplined and regular asset allocation to an asset class, whose volatile behaviour gets evened out by the steady flow, helping investors to create wealth through the ups and downs of the market.
Domestic mutual funds allow monthly SIPs for as less as Rs 500, the price of a pizza. At last count in August end, SIP accounts of the domestic mutual fund industry stood at 1.59 crore. Around Rs 5,200 crore flowed into the market through these SIPs in August, compared with Rs 3,500 crore inflow in the same month last year.
Despite its growing popularity, there are certain myths around SIPs that can make investors get the wrong end of the stick.
Myth: SIPs won't yield much returns
Fact: While this may be true in the short run or in a volatile market, the truth is SIPs are the best wealth creation options to accumulate and compound wealth, as long as one has a long-term perspective. If one were to constantly keep checking how an investment is faring, an SIP can disappoint in the short run
Data available showed an investment of Rs 1,000 made through an SIP in HDFC Top 200 fund starting September 2013, would have become around Rs 68,609, indicating an annualised return of 16.90 per cent.
The same SIP in ICICI Prudential Balanced Advantage started in January 2013 would have made you Rs 82,276 today; a return of 15.71 per cent.
In bad market conditions, the discipline of staggering investment through the SIP route can increase the base corpus and facilitate solid appreciation in the subsequent bull markets. Returns will, therefore, look good over the long term
Myth: SIP in any equity mutual fund will do
Fact: Given the sharp rise in inflows through SIPs in recent months, investors need to understand that investing in any mutual fund may not lead to automatic wealth creation. If you map 10-year SIP returns of various equity funds, you may find up to 8 per cent difference in annualised returns among some of them. Choosing the right set of diversified funds with an eye on the long-term performance track record is critical
The power of compounding cuts both ways; a bad choice can result in large difference in end returns, he warns
Myth: Markets are too high to start or continue an SIP
Fact: Time is investor's best friend in the stock market, goes the saying. Studies have shown that time spent in the market is far more profitable than timing the market. SIPs shield investors from periods of wild market swings and save investors from the futility of timing the market.
Secondly, in a weak market, one ends up accumulating more units of a security through the SIP mode of investment, which then results in lower average purchase cost.
Markets have their ups and downs. Market experts say there was a period in 2013 when a number of investors did not renew their SIPs, as returns for the immediate prior years were negative or low. Those who kept the faith on them were rewarded in the subsequent years
Investors will be better off if they don't allow market fluctuations to affect their decision to invest in or continue with an SIP. Anytime is good time to do it!
Myth: There is penalty if SIP is stopped in between
Fact : One can continue or stop a mutual fund SIP at one's own convenience. One just needs to provide a duly signed written request. There is no penalty whatsoever, or charge for stopping an SIP
Myth: If you agree to a SIP amount every month, you can never change it
Fact: If you decide to invest Rs 2,500 a month through an SIP and want to change it to Rs 5,000 next month or Rs 1,000 next month, there is total flexibility for you to do so. There are no charge associated with changing the SIP amount
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