Everyday Money: 3 Things to Know Before You Invest Through SIP
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Systematic Investment Plans or SIPs are increasingly becoming popular among investors. This can be seen in the increase of 37.95 per cent in SIP deposits from financial year 2017-18 to 2018-19, as per AMFI (Association of Mutual Funds in India).
One of the reasons for their popularity is that SIPs optimise investment returns over the long term. But there are several misbeliefs about them that distort investors' expectations from their investment. If you are looking to take the SIP route to invest, here is what you should know:
SIP Is Not an Investment
“Which SIP should I invest in?” This is a commonly asked question by investors that reveals a widespread misconception about SIPs. Take note that you don’t invest ‘in’ an SIP. Systematic Investment Plan (SIP) is an investment method and not an investment in itself. SIPs allow you to invest a fixed amount in a mutual fund periodically, just like recurring deposits. The frequency can be weekly, monthly or quarterly.
SIP Is Not Risk Free
SIP does not make equity investment risk-free. Equity is highly volatile and SIPs safeguard against it as they give you the benefit of rupee cost averaging. But they do not eliminate risk completely. In a falling market, your mutual fund investments are bound to go down. However, investments done through SIP compared to lump sum investments will reduce your losses.
Similarly, SIPs don’t guarantee returns over the long term. The returns are determined by the underlying fund.
Don’t time SIP
When your mutual fund investment goes down during a market downturn, don’t pause your SIP out of fear. Inversely, don’t increase it when the markets go up trying to gain more. This strategy can be counterproductive.
When the market is down, you will not only lose out on the opportunity to accumulate more units but also fail to average out your purchasing cost at a lower price. Similarly, by increasing it during a bull phase, you will accumulate lesser units at a higher price.
SIP by design eliminates the need for timing the market. Their main purpose is to inculcate investing discipline in investors and keep their fear and greed in check.