Eight myths about SIPs

Just like ‘little drops of water make a mighty ocean’, Systematic investment plans (SIPs) allow investing smaller amounts systematically over a longer period of time. While SIP is a great way to invest, there are few myths related to SIPs which are rooted in the imagination and not in reality. Let’s burst some of them.

Myth 1: SIP is equal to mutual funds

Truth: SIP is not an investment. In fact, it is a ‘method of investing’ in any asset class. It is a vehicle to invest. Clearly, one doesn’t invest in ‘SIPs’ as one invests in different investment schemes through ‘SIPs’. Therefore, apart from mutual funds, one can do a SIP in PPF, ULIPs, and bank recurring deposit also.

Myth 2: I can’t change my asset class after I start SIP

Truth: It is possible to change your asset class, even if you have started investing. Many investment options like ULIPs come with a fund switching option, which means that you can switch funds between equity and debt as per the market condition. For instance, if there is a fall in the market, you can switch your funds from equity to debt to protect your funds from market volatility. When the market improves, you can switch back to equity to reap the maximum benefits.

Myth 3: I will be penalized if I miss one or two SIP dates

Truth: In a SIP, you are making an investment every month and therefore, there is no question of penalizing you if you miss one or two SIP dates. This is not like the EMI of your loan in which the lender penalizes you if you miss an installment. As a matter of fact, you should not miss your investment date; however missing one or two SIP dates is not a crime.

Myth 4: SIP investments don’t give tax benefits

Truth: A systematic investment made in equity-linked saving schemes (ELSSs) is eligible for tax benefits under Section 80C of the Income Tax Act. Further, payouts received are also tax-free under the Income Tax Act. However, an ELSS comes with a lock-in period of 3 years.

Myth 5:  SIP should be started when the market is low

Truth: It is the ‘time’ and not ‘timing the market’ which should be considered. SIP works when you give it sufficient time. Therefore, any time is good to start your SIP. Further, as a fixed sum of amount is invested systematically at a pre-decided interval, SIPs protects investors from market volatility through its approach.

Myth 6: I can’t increase my SIP investment amount

Truth: As per your cash flow, you can increase your SIP investment through top-ups. It means, whenever there is a salary hike, or you receive a bonus, you can increase your SIP investment. To make an extra investment, inform your fund house.

Myth 7:   In a tax-saver SIP, entire money can be withdrawn after three years

Truth: The fact is every installment in your SIP should complete the lock-in period of 3 years. It means if you are investing Rs 4000 through SIP in the month of August 2016 the lock-in period of only one installment (i.e. August 2019) will get over in August 2019. It means, to withdraw your entire money, the rest of SIP installments also need to complete three years as well.

Myth 8:  You can’t stop SIP before the tenure

Truth: If at any point of time, you think that you can’t continue with your SIP, you can terminate it even before the completion of the policy term. The money that you have invested so far will remain invested in the fund.

SIP offers the flexibility to invest as per the requirements. Moreover, you can also invest online as per your convenience. As myths associated with SIPs are unrealistic and cause more harm than good, it is important to get rid of them to enjoy maximum returns.