Mutual Funds have become really popular over the last 3-4 years. The monthly SIP investment in equities has grown by 200% in this time. But with it, has come a lot of misinformation and misbeliefs. In this article, we identify what these mutual fund myths are and what’s the real truth behind them.
There are four mutual fund myths (and especially for SIPs) or misconceptions which are:
- Only small investors go for mutual funds
- SIP have a different treatment as compared to lumpsum investments
- Missing an SIP leads to penalties
- Entire money can be withdrawn after 3 years in a tax saving SIP
For more detailed understanding of SIPs, do read my articles on benefits of mutual fund SIPs and the best SIP plans for 2020
Only small investors go in for mutual fund SIP
This mutual fund myth emanates from how SIP is advertised in media. The advertisement goes like – you can start from as low as ₹500 and keep adding small amounts to accumulate a large corpus. The case is a matter of relativity i.e. small steps lead to a giant leap. SIP is actually used by everyone including affluent investors to apportion a part of their income into an investing plan.
It is not uncommon to see educated professionals and CEOs setup SIPs running into a few lac of rupees. They do this smartly by dividing their investible surplus into 9-10 funds. The purpose is often to accumulate wealth, flexibility to withdraw, asset allocation and tax benefits
SIPs have now become mainstream. The evidence of that is in the burgeoning adoption of mutual funds as a trusted and reliable avenue to build one’s wealth. In numbers, the SIP contribution has risen from ₹1,221 crores in March 2013 to a staggering ₹8,055 crores in March 2019.
That’s a 660% jump in a mere 6 years!
Yes, mutual funds and SIP is for everyone.
SIPs have a different treatment as compared to lumpsum
This is totally untrue because SIP and lumpsum are very much the same side of the coin.
Infact, you can treat SIP and a bunch of lumpsum investments so the treatment of SIP and lumpsum investment is exactly the same.
The advantage of an SIP over the lumpsum is that the former follows a systematic strategy while lumpsum is an ad-hoc investment.
This however has no bearing on which one is better for an individual. If you can do ad-hoc investments and yet follow a strategy, then please follow that. The idea is to invest your investible surplus rather than keeping it in a savings account or poorly optimized financial products.
This is yet another mutual fund myth which needed to be busted. Afterall lumpsum and SIP have the same treatment.
Missing an SIP leads to penalties
This is a common mutual fund myth.
The common reason for missing an SIP is when you are short of balance in your savings bank account. The mutual fund company does not penalize you for missing an SIP instalment.
Even if you miss an instalment, the mutual fund will continue to send the debit requests to your bank. They will do this for a minimum of three months. And if the miss goes beyond three months, then the SIP is automatically cancelled.
This does not in any way means that you have lost your money. Your investment is still available for access to you in your mutual fund folio in the form of units.
However there might be a penalty.
Your bank might levy one for dishonouring the payment due to insufficient funds. This is similar to the cheque dishonour charges. All banks have their own set of charges but they generally range from ₹150 to ₹750.
The good news here is that most fund houses and platforms like ETMONEY allow their users to pause or cancel the SIPs.
You can pause your SIP for a limited period, 3 months in most cases post which the SIP will resume automatically. It is important to note that most fund houses allow investors to pause the SIP only once. If your financial position doesn’t allow you to continue beyond the 3 month break then my suggestion is for you to cancel your SIP. Yuu can start a fresh one a little later when your finances improve.
Entire money can be withdrawn after 3 years in a tax saving SIP
This is not correct and forms another mutual fund myth which needs clarification.
Equity-linked Savings Schemes (ELSS) are mutual fund schemes that come under the tax saving bracket. This is where money invested in these scheme can be applied to the deductions allowed under Section 80C of the Income Tax Act, 1961.
This means if you invest money in an ELSS fund on 1st January 2020 – you can apply it while filing your income tax returns for FY19-20.
Now, there is one major condition when it comes to ELSS funds. There is a lock-in of 3 years i.e. you cannot redeem or switch units within three years of investment.
So the money I invested on 1st January 2019 can only be redeemed by me on 1st January 2022.
The confusion on SIP is that some users believe that if a monthly ELSS SIP is started on 1st January 2020 with ₹1,000 (for which you received 20 units), the entire accumulation (say, the fund has grown your money to ₹50,000) can be withdrawn on 1st January 2022.
This is not correct.
On 1st January 2023, you can only withdraw the investment you made with respect to the units that were allotted to you on 1st January 2020 i.e. 20 units.
Now, it is possible that the 20 units have grown from ₹1,000 to ₹1,700 in these 3 years – then you can redeem ₹1,700.
The second instalment of the SIP was debited on 1st February 2020 and hence, those units can be redeemed or switched only on 1st February 2023.
Additional Resources You Might Like
Here are some articles you might like:
- Rakesh Jhunjhunwala and his secrets to investing (Part 1)
- Complete SIP Investment Guide (over 8000 words compedium updated until 2020)
- The trillion dollar index fund story that John Bogle started in the 1970s
- Best SIP for achieving long term goals
- 5 steps on choosing the right term insurance plan for yourself