Here I would like to start this article by defining "What Is A Myth". A myth is a story which may or may not be true. It is generally old and its conclusions might have been lost in time. However in general a myth is a story whose conclusion is taken for granted without checking it. Many a time the wrong conclusions are drawn. "He Who Must Catch Fish Must Not Mind Getting Wet" This basically means that in order to succeed in our systematic investment plans we need to demystify the myths. Only then can we make an informed decision in order to invest in a Systematic Investment Plan. I would like to remind all of you that the team of financial planners at IndianMoney.com is always there for you to plan your mutual fund needs in an efficient manner. You can explore this unique Free Advisory Service just by giving a missed call at 022 6181 6111.
Here many people try to do an SIP in a single stock; An SIP is done in an Equity Diversified Mutual Fund which is a portfolio or basically a collection of a number of stocks in different sectors. We cannot do an SIP in a single stock. But I will stick only to Blue Chip Stocks? However good a stock is it is too risky to put all your eggs in one basket. Many companies perform well for about 3 years and some of them become a part of the major Index like the BSE Sensex. A certain major Infrastructure company was once part of the BSE Sensex but now it no longer is part of the Sensex. If we look at the power sector we find all the major power Companies languishing in the doldrums. This is mainly because of lack of coal supply .Imagine if we had taken a bet in a single major Power company or for that matter a major Telecom Company which is shaken up due to the 2G scam. What would be our state? Everyone is wise after a bitter experience but a wise man learns from other’s mistakes.
Here SIP is a concept or a technique and does not depend on the sums of money invested. Here many people believe that an SIP is only for small investors who want to save for a rainy day. Do you think this is true? Here an SIP does not depend on the sums invested. An HNI might invest INR 500000 per month in an SIP and a salaried man say INR 5000 per month. Here we see that both of them are making use of the SIP albeit for different amounts. Here a man becomes rich not by doing things differently but by following the basic rules and doing the right things. Remember the piggy bank we all had in our school days. This is basically an SIP without a rate of return.
Here you might have heard many people ask What Is the NAV of my SIP? Here people forget that SIP is a tool or a technique to invest in the stock market. It is not a mutual fund and does not have an NAV value. Here this is a technique to invest in a particularly good mutual fund.
Here people state that we should start an SIP when the markets are low and exit when the markets are high. How does one come to know when the markets are high and when the markets are low? Who could predict the highs of the stock market in 2007 or for that matter the stock market crash of 2008 due to the USA Subprime lending crisis. The very basis of an SIP is to stay invested in the market irrespective of the ride. Here the ride could be smooth, choppy or outright Stormy. "Remember Caution Is The Parent Of Safety".
Here many people believe that SIP is a magic wand that can skyrocket the returns on our investments .Don’t these SIP’s give us great returns over a 5 year term period? .Here one needs to be wise and prudent while demanding returns from these funds. No one can predict market crashes and if we had started our SIP in the Year 2007, what would be the value of our SIP’s in December 2008. Here in an SIP we have to plan the mutual fund scheme, time horizon and the period of investment. Here we obtain lesser units of a mutual fund when the market is rising due to rise in NAV and higher number of units in a falling market due to a lesser value of an NAV. Unfortunately most of the people close up the SIP in a falling market taking up great losses.
Here this might not be entirely true. Let us consider a case in which 2 cousins Rajeev and Sanjay invested a corpus of INR 50000 each on December 1st 2008.Rajeev invested a lump sum amount of INR 50000 and Sanjay invested in an SIP on a monthly basis. When we compare the returns we find that Rajeev easily outshone Sanjay. Why Did This Occur? Aren’t SIP’s The Best Form Of Investments In The Share Market?. Here over a longer time frame say over 5 years few financial instruments beat the SIP. But in certain cases as shown in this example the SIP does get beaten. Here the Sensex moved in a very abnormally high pattern to achieve a value of around 12000 in the month of May 2009 from lows of around 8000 just 6 months earlier. It consequently moved to almost 17000 by the end of the year thereby doubling in a time period of a year. Since half of Mr Sanjay’s SIP were made during the period from May-2009 To December 2009 he purchased units at higher NAV values. Thus Rajeev was able to beat him with handsome returns in spite of not investing in an SIP. "Remember Don’t sell The Bears Skin Before You Have Caught It"
Here an ELSS has a fixed lock-in period of 3 years. However when we invest in an SIP of an ELSS we invest on a monthly basis. This works on a First In First Out Basis. Here the entire amount can be withdrawn only after 6 years. Here each installment of the SIP is locked for 3 years. This needs to be noted when SIP is made in an ELSS.
Here in the case of an SIP monthly deductions are made on a regular basis from our accounts. However if we do not maintain sufficient funds in these accounts the SIP installments will not be made. Remember this is unlike an EMI where we would be penalized if we miss our payments. Missing our monthly SIP Payment does not become a crime. Only if we miss 3 continuous SIP installments then the policy stands cancelled. Some investors think that if they want to invest a lump sum in the market they have to maintain a separate account. Here you can always make some lump sum investments in the f und in which your SIP is running.
Here it is utterly foolish to maintain your savings for retirement years in such a risky class as an Equity. Here if there is a crash in the market during the time you want to make the systematic withdrawals your entire corpus is lost. Always shift your assets in equities to a less risky asset such as government bonds or fixed deposits when the market is giving good returns a few years prior to your retirement. Here you can also sell or liquidate about 20% of your portfolio if the market is giving stupendously high returns even 5-10 years prior to your retirement.
Here I would like to end this article with the saying “He Who Does Not Make Mistakes Never Learns " We learn through our experiences and mistakes ". Here a person who stays invested in the market through SIP learns from the Up’s and Down’s faced in the market. He learns to separate myths from the truth. Here I would advise you to look up the website IndianMoney.com in order to learn about mutual funds.
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