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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.
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Systematic Investment Plans (SIPs) have proved to be a very popular method of investment in India. They allow you to invest an amount of your choice at fixed intervals, you get to choose the periodicity of payment, and you get the benefit of rupee cost averaging. Sadly, there are a number of misconceptions about SIPs, and if you believe them, you might end up losing great investment opportunities.
Here are some common myths about SIP investments.
Myth # 1: You should stop investment in SIPs if recent returns are not good
Of all the myths associated with SIPs, this one is the most widely misunderstood. Just because you find that your recent returns have not been good, it most certainly does not mean that you should discontinue your SIP. Remember that the best way to get good returns from your SIP is to stay invested for longer duration (10-12 years). A year or so of low returns, therefore, does not matter. You are in for the long haul -- if you react in a knee-jerk manner to recent low returns, you will miss a great investment opportunity.
Myth # 2: SIPs are very risky as they are linked to the market
An equity-linked mutual fund will surely have to battle market volatility. Yes, markets can go down, but then, they can also go up. Your SIP investment is actually a way to take advantage of volatility. Investing in SIP shields investors from periods of wild market swings. In a weak market, you will end up buying more units, and in a strong market, you will buy fewer units. In the long run, you will benefit from rupee cost averaging. As said earlier, SIP investment makes sense only if you are willing to commit to it for longer duration (10-12 years). This is a long enough period to average out your investment and still get great returns.
Myth # 3: SIPs in low NAV funds will offer higher returns
Some investors believe in the myth that a fund with a low Net Asset Value (NAV) is cheaper and hence, investing in SIPs with low NAV funds will offer higher returns. The NAV of funds is totally irrelevant; you should not even consider it when choosing your funds when investing in SIPs. The cost of a scheme in terms of its NAV does not determine its returns. When you are looking for a mutual fund to start your SIP, look for its performance against its benchmark, not its NAV.
Here’s an example: Suppose you want to invest Rs.5000. You come across two funds, one has a low NAV of Rs.10, and the other has a high NAV of Rs.50. In the case of the fund with a low NAV, you can buy 500 units, each worth Rs.10. In the second case, you can buy only 100 units, but each will be worth Rs.50. In both cases, the value of the investment will be identical. So forget the NAV, and look for actual performance.
Myth # 4: SIP is only for small Investors
Just because SIPs give you the option to invest small amounts, it does not mean that you cannot invest larger amounts. You can start investing in SIPs with any amount, but you cannot go below the minimum amount fixed by the scheme you choose. This is generally Rs.500.
Myth # 5: The SIP amount is fixed
The fact is that you can change your SIP investment amount any time; you can choose to deposit a larger amount or a smaller amount, as per your convenience. All you have to do is notify your bank and make a small adjustment.
And now that the myths are busted, go ahead and make an intelligent choice.
Disclaimer:
Mutual fund investments are subject to market risks, read all scheme related documents carefully.
"The calculator is only an illustration, to demonstrate the concept of compounding and should not be constructed as a promise, guarantee or a forecast of any minimum returns or future returns. Kotak Mahindra Bank does not assure any safeguard of capital and investments through SIP, does not guarantee or assure any protection against loses. #Mutual Funds are subject to market risk. Please read all scheme related documents carefully before investing. Past performance may or may not be sustained in the future."
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