SIPs or Systematic Investment Plans are offered by diverse mutual funds where investors can put in money for Mutual Fund schemes on monthly/fortnightly/quarterly/annual bases. SIPs enable disciplined creation of wealth from a long-term perspective. However, investors sometimes make mistakes that cost them heavily in terms of financial losses or miscalculations of the target amount or SIP amount. Here are some of the biggest mistakes made by investors that you should avoid:
- Zeroing in on the right SIP amount- Several investors initially commit a large amount for SIP investments without realizing that this could be detrimental, considering their financial situation. This may lead to these investors dropping out of the plan sometime later or simply losing interest in investing for future growth. At times, committing a tiny SIP amount may also fall short when it comes to reaching your targeted amount. The best way to commit an amount is to thoroughly analyze your financial situation, your own risk appetite and the targeted goal for which you are investing in the first place.
- Short-Term Approaches do not work- Investors often invest in SIPs for very short periods of time, which does not quite yield the growth results that they desire. Investors often miss out on the fact that their SIP value is not dependent only the amount invested but also on the duration. The longer one invests, the higher value one gets for the investments made. If someone pays Rs.5,000 every month for an SIP over five years, the total invested value will be Rs.3 lakh and the total amount would touch Rs.4.12 lakh in five years with the rate being assumed at 12%. Suppose this amount was invested for 10 more years, the invested value would be Rs.9 lakh but the total value created in 15 years would be a whopping Rs.25.23 lakh assuming 12% interest per annum.
- SIP commitments should be increased periodically- With increases in your own income, you should invest more in SIPs. Many investors make this mistake as well. The initial goal can always be made bigger. Fueling the existing SIP is always a good idea, particularly in times of appraisal or even when getting a bonus.
- Financial status should determine quantum of SIP investment- Investors often have an erroneous perception that only smaller amounts should be invested in SIPs when in reality, this investment should be determined by one’s present financial status and the target for which the SIP has been started.
- Growth is always a very positive change- Investors are given two options, namely dividend or growth. Dividend indicates withdrawals from this corpus and the compounding effect goes down as a result. This affects the growth of the corpus, which is targeted after a certain period of time. It is better to choose the growth option where compounding works better or even choose a dividend reinvestment option for higher returns.