Let's look at some common mistakes and the probable solutions for the same.
Deciding on a High Investment Amount
SIPs are similar to your Equated Monthly Installment (EMIs). You need to invest a sum of amount each month or quarter and commit to the investment amount throughout its tenure.
But don't get too carried away and end up committing a high investment amount that will be difficult to arrange month on month. For example, when you are single, it would be easier to invest a big amount. However, when you have a family, continuing the same large amount can be a little difficult.
Assess your overall capabilities in the long-run and then decide on the correct investment amount that you can part with each month. If possible, opt for a plan that allows you to increase periodically the amount you invest.
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Opting for a Short Tenure
People want more money in less time and get into an SIP for that objective. But, when you opt for a small tenure like 1-2 years, you are at a higher risk of market volatility.
The market is prone to ups and downs throughout the year and a shorter tenure lessens your chance of cost averaging. Therefore, there is a higher chances of lower returns in a shorter tenure. This depends on whether or not the market sees a bull run.
Opt for a longer tenure in order to tap into averaging benefits of SIP and you stand a chance to get reasonable returns. Historical performance over various periods of time suggest that the markets have a much lower chance of loss if you hold on for long period say over three years. Moreover, by increasing the tenure of the SIP, you can also lower your monthly expenses.
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Abruptly stopping an SIP
Investors are wary of market conditions. When the market is down, investors tend to lose hope and discontinue their SIP abruptly. The risks of greater market volatility drive them to stop their investments. After all, seeing red marks all over your portfolio value can make people panic. But that is where they are going wrong.
Take a retail sale for example. Does a fall in value cause you to stop buying? No, in fact, you wish to take advantage of the discounts. Consider the market fall in the same fashion. Continue your SIPs. You can buy more mutual fund units for the same price when the market is down. In the long run, this can help bring down your total cost of investment. Plus, SIP investments are distributed over several months. This also helps to reduce the adverse effects of market downturns.
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Set-up and Forget
A lot of people tend to forget and often fail to renew their SIPs on time after they have invested
once. That’s like leaving a cooker on low flame and never checking if the food has finished cooking.
You will end up with burnt food. Similarly, you will end up losing your opportunities.
Renewals are the best time to rethink your investments. Does the mutual fund remain significant to
your investment strategy? If yes, then continue to invest. Otherwise, switch to others if needed.
Choosing Dividend over Growth
The power of SIP lies in the benefit of compounding. This is when you get an interest or return over your past interest payments, thus creating a chain of interest and could help generate reasonable returns over a long period of time. In the case of SIP, this happens when you reinvest your dividends to purchase more MF units. However, investors often opt for the dividend payment option. This defeats the compounding effect.
Growth may be a better option for you as compared to Divided, unless you are in need of the secondary source of income. In you are investing for the long term, the Growth option may help you achieve your goals. If you need help deciding what it is you are planning for- be it your child’s education, your own retirement or even a major purchase, here’s how to Know what you want to get what you want.
If you caught yourself nodding to some of these mistakes, don’t fear. It’s never too late to correct mistakes. If you think you are committing one or more of these, just opt for the solution. Most importantly, rethink and make an informed decision.