Here is an interesting read I came across in Equity Master site:
“Myths and creeds are heroic struggles to comprehend the truth in the world.”- Ansel Adams.
In the world filled with information galore and cultural change, many of us develop our own set of beliefs and judgements. While that’s great to do, it is vital to recognize whether you are living with plain truth or mere delusions.
In the world of investments too, today we are exposed to galore of information. Take for instance when you step out for a social gathering; you may have come across individuals discussing about the stock markets, which sectors to invest, which mutual funds to invest in, or simply even which avenue of investment to deploy money. And mind you, while we do recognize that while everyone has view on all these, we think that for your financial well-being it is necessary that you conduct enough research, thus enabling you take a wise investment decision suiting your investment objectives. This is because if incorrect information sometime shared by your friends and broker, may blind your ability to understand things in the right perspective, thus guiding you on the wrong path.
In the present volatile market conditions, while there’s lots talked about the market outlook it imperative for you not only to take a well informed decision, but also be free from myths. As in our last article while we have explained you how Systematic Investment Plan (SIPs) can help you manage the market volatility, over here we thought of sharing some of the common myths which we have experienced some investors have while approaching SIPs.
(Also see: Benefits of Equity SIP)
Myth no. 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 delusion 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 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 realize 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.
Myth no. 2: Rupee cost averaging can be done in a stock itself – then why SIP?
It’s noteworthy that, certainly you can bet on equity, 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 the mutual fund. 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.
Myth no. 3: SIP mutual funds are different from lump sum mutual funds
Well many have this delusion. The fact is, there are no special schemes for SIP investments. SIPs are just a mode of investing. 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 Assets Under Management (AUM), liquidity, expense ratio, portfolio characteristics etc.
Remember, there’s more than just a return while selecting a mutual fund scheme for your portfolio.
(Also see: Long term Strategies for Equities)
Myth no. 4: Lump sum investments cannot be done in a scheme, where a SIP account exists
It is noteworthy 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 Rs. 1,000 going on in a mutual fund scheme and suddenly you have a surplus of say Rs. 50,000, then you can pump a lump sum amount to your ongoing Rs. 1,000 SIP account.
Myth no. 5: I’ll be penalized if I miss one or two SIP dates
While enrolling for the SIP mode of investing you are required to provide your ECS mandate form along with the common application form. Your SIP details (as selected) are already mentioned in the ECS mandate, thus 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 Installment) of your loan, where you miss an installment; you are penalized.
Remember, SIP infuses discipline in investing and is entirely at your free will.
Myth no. 6: I’ll accumulate through SIP and liquidate through SWP during retirement.
Well, if you adopt this financial planning strategy, you are bound to face nightmares during your retirement. It is noteworthy that, 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 risky. In order to maintain a lifestyle post-retirement, you should transfer your savings to low risky asset classes such as debt and cash from a high risk asset class like equity.
Remember to adopt the right strategy while planning your finances – think wise!
Myth no. 7: Markets are 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 by 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 as the yield will work 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.
Myth no. 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 a 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 that every installment of your SIP should have completed the lock-in tenure. So say if you put in Rs. 5,000 through SIP in the month of January 2012, the lock-in period for only 1 installment (i.e. January 2012) will get over on January 2015. While other SIP installments need to complete 3 years as well.