Are your investment decisions influenced by your friends, colleagues, family, etc? If yes, you could be at a serious risk of losing money. Many a times in your normal day-to-day conversation with friends, colleagues, family, etc. a lot of incorrect information is exchanged, and it is no different when it comes to investing. And this in turn very often blinds your ability to understand things in the right perspective.

 

Moreover, the incorrect information creates a delusion in front of you (just as a mirage in a desert), thereby restricting you to take the right decision. This thus leads to misconceptions in your mind about certain things. These misconceptions or myths may turn out to be disastrous for your wealth as well as your health.

 

In the business of providing unbiased and independent mutual fund research and advisory services, we often come across clients who live under myths. When we tell them invest in mutual funds through the SIP route for its advantage of rupee-cost averaging and compounding, this is what we hear (the myths mentioned below). And in order to remove this delusion, we have provided our reasoning thereto:

 

1. Only Small investors go in for SIP
   
   Please note that SIP stands for Systematic Investment Plan (SIP) and not Small Investors Plan. Hence, it is incorrect to be under the illusion and arrogance that SIP, is meant only for small investors.
   
   Remember those good old days, where our parents subscribed us to a good, regular saving habit by buying us a piggy bank, where we all saved some money every day or week or month to build a corpus at the end of a particular period. But the fact was the regular deposits in your piggy bank, did not earn you a rate of return. In case of SIPs (Systematic Investment plans) too, if you go by the same logic of the piggy bank, you would realise that your money saved in a systematic manner – may be daily, monthly, quarterly, for a said tenure (period of SIP) will help you to build a corpus earning a rate of return, in order to attain your financial goal.
    
2. Rupee cost averaging can be done in a stock itself – then why SIP?
   
   Anyone can bet on equity and make quick bucks but mind well everyone does not have penchant towards stock picking as Mr. Warren Buffett does. So you may fancy yourself by investing in stock markets as they appear to be more exciting. But diversification through mutual funds would help you to reduce the stock specific risk which you are exposed in direct equity (stocks).
   
   Moreover, as per the market cap bias (i.e. large cap, mid cap and small cap) which a fund follows, you can also strategically structure your portfolio depending upon your risk appetite. Similarly, you can structure your portfolio on the basis of the style (viz. value, growth, blend, opportunities, flexi-cap, multi-cap etc) of investing followed by a mutual fund scheme. And by adopting the SIP mode of investing for mutual funds, you’ll benefit from rupee cost averaging and compounding.
   
   Remember a SIP experimented on single scrip, can expose you to more volatility unlike SIP in mutual funds which reduces the risk, due to diversification provided by mutual funds.
    
3. SIP mutual funds are different from lump sum mutual funds
   
   This is a classic delusion which many investors have. The fact is there are no special schemes for SIP investments. SIPs are just a mode of investing.
   
   Well, you can enroll for a SIP in any mutual fund scheme, but ideally you should select a mutual fund taking into account the qualitative parameters such as investment processes and system, fund manager’s experience, uniqueness of the products etc., along with quantitative parameters such as returns, risk, average AUM (Assets Under Management), liquidity, expense ratio, portfolio characteristics etc. Remember, there’s more than just a return while selecting a mutual fund scheme for your portfolio.
    
4. Lump sum investments cannot be done in a scheme, where a SIP account exists
   
   Again please make a note that SIP is just a mode of investing in mutual funds. Hence, pumping a lump sum amount to a mutual fund where your SIP exists is possible. So, say you have a SIP of 1,000 going on in a mutual fund scheme and suddenly you have a surplus of say 50,000, then you can pump a lump sum amount to your ongoing 1,000 SIP account.
    
5. I’ll be penalised if I miss one or two SIP dates
   
   This is one more classic delusion haunting many investors from enrolling a SIP. Let’s make it simple. While enrolling for the SIP mode of investing you are required to provide your ECS mandate form along with the common application form.
   
   And as your SIP details (as selected) are already mentioned in the ECS mandate your bank at regular SIP dates keeps debiting the SIP amount in favour of the fund where you have opted a SIP. Hence, the question of missing dates doesn’t arise.
   
   Now for some reason if you are not maintaining a balance in your bank account for your SIP to be debited, you would simply miss that SIP installment, but your SIP account will remain active and further SIPs (subject to your bank balance) will be debited to your bank account. So, it’s not like the EMI (Equated Monthly Instalment) of your loan, where you miss an instalment; you are penalised. Remember, SIP infuses discipline in investing and is entirely at your free will.
    
6. I’ll accumulate through SIP and liquidate through SWP during retirement.
   
   You are bound to face nightmares during your retirement if you follow this strategy. Remember as you approach retirement your appetite for risk reduces, as your number of years of earning life decreases. Hence having savings lying in equity mutual funds during retirement years can be very risky.
   
   In order to maintain a decent lifestyle post-retirement, you should start transferring your savings to low risky asset classes such as debt and cash from a high risk asset class like equity as you approach your retirement age.
   
   Remember to adopt the right strategy while planning your finances – think wise!
    
7. Markets are too high to start a SIP
   
   Well, if that’s what you think, then you should be starting a SIP immediately. That’s because as the market corrects you would be accumulating more number of units, with every fall in the NAV, thus enabling you to lower you average purchase cost. And, as the markets, post the correction surge once again, you would gain on you overall investment as the yield will works out to be higher. Remember by adopting the SIP route for mutual fund investments, you are shielding your portfolio against the wild swings of the markets. Don’t unnecessarily try to time the markets as it is not always possible.
    
8. In a tax saver SIP entire money can be withdrawn after 3 years
   
   In case of a SIP in tax saving mutual funds (commonly known as Equity linked Saving Schemes – ELSS), very often this delusion exists that, the entire investment in a tax saving mutual fund can be withdrawn once the lock-in period is over. But that’s not the case!
   
   The fact is your every instalment of SIP should complete the entire lock-in tenure of 3 years. So if you put in 5,000 through SIP in the month of October 2010, the lock-in period for only 1 instalment (i.e. the October 2010 one) will get over on October 2013. Remember your each SIP instalment must complete the 3 year period as well.

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