Here are the myths related to SIP that you should not fall for:
SIP never hurts
they can do. SIP is just a way of investing in MFs, which are market linked products. It is the basic nature of the products linked to the market going through phases of boom and bust. So, if the stock market takes a long journey south after you start your SIP, your portfolio will show losses as long as the downside continues.
In 2017, Value Research conducted a comprehensive study on the real life returns of SIPs in over 200 diversified equity funds for a period of 25 years from 1992 to 2017. After examining more than 3.6 lakh monthly SIPs in the study, it was found that the SIP was gone. There was a 22 percent chance of loss for just one year. But if investors continue their SIP for 4 years, then the chances of loss come down to less than 6 per cent. This is quite intuitive, as major bear markets in India rarely extend beyond four years.
In fact, if your SIP portfolio shows negative returns in the short term, you should take this as an indication that the SIP concept is working as it should. After all, the main objective of spreading your investments over several months rather than investing in one go is to avoid the damage to your portfolio by investing large sums of money at market highs.
SIP returns always beat lumpsum
SIPs give better returns than lump sums when you start your investments at a higher market level, keep investing through a downtrend and then watch the market bounce back in the green. However, there are other market scenarios where a SIP investment can earn returns less than a lump sum. is in a vertically growing market. This is because in a one-way market, SIPs average your costs upward rather than downward.
But if SIPs don’t always give better returns than lump sum, why go the SIP route? Well, this is important because markets rarely move vertically. Equity funds give the best long term returns if we can have confidence with them during bear markets. Still, most of us are practically wired to put more money in equity funds when the markets are high, and cut back when they fall. SIP helps us to overcome this bad habit by inculcating discipline.
Stock SIP funds are better than SIP
Yes, stock SIP can help you average out your purchase price and multiply your money if you manage to choose stocks that outperform the markets on a multi-year basis. But finding such stocks is not easy and requires you to closely track both the company and the sector.
Stock SIPs can backfire in three ways. One, when you deposit stocks through SIP, you can own a very high concentration of it in your portfolio. Two, multi-bagger returns in different stocks come from identifying when they are unknown, recording them at low prices, and tracking the business to make sure it is accurate. A SIP, by putting your investments on auto-pilot, can detract from such close tracking. Third, if you are a seasoned investor, you will know that no stock is an ongoing ‘buy’ at any cost. Often, stocks or sectors that appear to be major buys at a time are avoidable within a few months.
When you sign up for a SIP in a mutual fund, you are buying into a professionally managed portfolio. If the trading performance of some stocks in the fund’s portfolio declines after starting the SIP, then you need not worry as the fund manager can replace them with better options.
In short, SIPs are great investment tools to inculcate discipline and keep you away from behavioral mistakes that incur a huge cost on your returns. But it’s important to understand how they work to make the most of them!
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Author – Aarti Krishnan (Originally published in IPRU Insights)
Disclaimer
An investor education initiative.
meeting www.icicipruamc.com/note To know more about the process of fulfilling the Know Your Customer (KYC) requirement for investing in mutual funds. Investors should deal only with registered mutual funds, details of which can be verified on SEBI website http://www.sebi.gov.in/intermediaries.html, For any queries, grievances and grievance redressal, investors may contact the AMC and/or Investor Relations Officers. In addition, investors can also file complaints on https://scores.gov.in If they are dissatisfied with the proposals made by the AMC. The SCORES portal allows you to register your complaint with SEBI online and view its status later.
Mutual fund investments are subject to market risks, read all the documents related to the scheme carefully.