‘Should I continue my SIP or stop?’, Owing to the recent market conditions, this is one question a lot of investors have asked and a question we have heard far too many times. But here’s a fact. The mutual fund industry in India added ~9.15 Lacs new SIPs every month of last FY (as per AMFI released data). The SIP contribution in India is increasing because investors are becoming more and more aware of the advantages it brings along with it. Along with the power of compounding, SIP works on the principle of Rupee Cost Averaging, which actually ensures that you buy less when the NAV (Net Asset Value) is high and vice versa. This averages out your cost over a longer period of time. Hence, let us be more informed as investors and make the correct choices.
Below, we bust some commonly misleading myths about SIP-
Myth I- SIP amount cannot be changed
Of course, it can be! You can choose from the top-up options available if you wish to continue investing in the same mutual fund. Most of the fund houses offer a fixed % increase over your existing amount which can be opted for. Or if you wish you can start afresh SIP either in a new or the same mutual fund. However, if you wish to change the amount, you might have to contact your investment adviser.
Myth II- SIP guarantees positive returns
Let us understand one thing as a thumb rule for mutual funds. Be it any mutual fund or any mode of investment, the investors are advised to gauge the fund basis the longer-term returns. Similarly, for SIP, it is possible that the short-term return of a fund you have invested in is negative. It is linked to the market after all. But let that not deter your discipline in investment or have you change your investment strategy. The returns do get diversified over a period of long-term.
Myth III- Penalty if you stop SIP
No, there is no penalty levied if you stop your SIP midway; however, that is not advised from the returns point of view. But there might be exit charges applicable to the mutual funds you are investing in hence it is relevant here to speak to your advisor before you decide to redeem.
Myth IV- SIP is in equity mutual funds only, irrespective of the investment horizon
Your choice of the mutual fund to invest in must factor in your investment horizon. If your investment horizon is less than 3 years, it is advised to consider debt fund for SIP investments. This is primarily because equity mutual funds (being dependant on the stock market) might not have the most stable returns during a tenure as small as 3 years.
Myth V- SIP must be initiated when the market is Bullish
It has been a common trend to discontinue SIP investments or initiate them when the market is Bearish (comparatively weak). However, if looked at logically, it beats the purpose of SIP. Investing in a Bullish market implies you are investing when the market goes up and giving it up when the market goes down. In fact, if at all, you must do the opposite. SIP helps an investor diversify his costs because not all of us are capable of predicting the dwindling markets. Once invested, you must stay invested irrespective of the market situation.
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Also Read: How to choose a Debt Mutual Fund?