With the number of investment avenues rising daily, confusion regarding which avenue to invest in is also increasing. Although, SIPs have made the decision making the process simple as it is one of the safest ways to invest your money but using the simplest tools can sometimes not work in your favour if not properly utilized. One mistake can beat up your systematic investment plan pretty significantly. So here are some of the common mistakes which people make with their SIP’s:
- Premature exits: When equity markets decline, investors tend to exit from SIP’s fearing losses. They actually end up far worse compared to those who stay invested for 8 – 10 years or more, who actually gain immensely.
- Unjustified euphoria: When equity markets are going up sharply, investors either exit from SIP’s or move to lower risk investments like fixed deposits. This limits the long-term growth prospects of their money.
- Incorrect interpretation of performance benchmarks: People often discontinue SIPs comparing performance with benchmarks of peer funds over very short periods of time, be it monthly, quarterly or yearly basis. The comparisons need to be over one, three and five year periods.
- Comparing SIP and lump sum returns: Many investors incorrectly compare SIP returns with returns of lump sum investments. SIP investments are made over a period of time and get different time periods to grow. This needs to be taken into account.
- Don’t put all your money in 1 fund: A mutual fund with everything good can be pretty tempting but this is the most common mistake people make while investing in a mutual fund through SIP. Divide your investment amount into at least 2 mutual funds.
- Increase your investment when your income increases: You should always try to increase your contribution to your systematic investment plan. However, you can start with as low as Rs.500 and increase this amount slowly and gradually with the rise in the level of your income. For example, you earn Rs.50,000 and you invest 10% of this amounting to Rs.5,000. However, after say 4 – 5 years, you earn Rs.1 lakh and still, you invest Rs.5,000 towards your SIP, then you will not be able to reap the full benefits of the SIP over time. The sensible thing to do would be to invest 10% of Rs.1 lakh, which amounts to Rs.10,000. The basic idea is to increase the level of investment in proportion to the level of increase in income. This way, you can also understand the power of compounding small amounts over time.
- Selecting the wrong fund: People need to perform their due diligence before selecting a SIP to invest their money in. They must have the financial goals clear in their mind. Once you have decided the goal for your SIP, then you are very likely to select a plan that works the best for you. If you don’t put much thought into deciding your investment goals, then returns on your SIP will also turn out to be slow and below your expectations.
- Dividend or growth: If you really want to understand the power of compounding, then you should definitely invest in SIP’s. Choosing between growth and dividend can be a real headache. Dividends are useful when you are in the need of side income. Pulling out dividends and keeping them idle will not do any good to you or to the SIP. Most people commit this mistake as they get tempted by the dividends, but what they don’t understand is that only growth of the SIP will take them a step closer to the accomplishment of their financial goals.
- Exiting during turbulent market: During falling markets or turbulent markets, the fear of losses forces many investors to make the mistake of exiting their systematic investment plans. SIP’s reward typically after a long period which could be a loss for you if you exit the plan after witnessing a fall. If you exit the market during turbulent conditions, you may not be able to reap the benefits of compounded growth. Premature exits deprive you of this great advantage.
- Investing for a short-term: Once the SIP has provided a decent reward, people tend to exit. But, this reward is way less than what you would have received if you would have stayed invested for a longer period of time.
Investing through SIP is considered as one of the safest ways to invest your money. It allows for you to create wealth without the need to time the market. However, to maximize your benefits from SIP’s you should choose the best SIP plans according to your financial goals and avoid making the above-mentioned mistakes.