9 SIP Mistakes To Avoid: A Guide To Smart Investing
Systematic Investment Plan or SIP is an investment approach wherein the investor invests a pre-determined amount of money in an asset at regular intervals. This approach aims at harnessing the power of compounding in order to create a significant investment corpus over time. Investing via SIP has multiple advantages including inculcating financial discipline, granting increased flexibility and ease of investment depending on the prevailing financial and economic climate and benefits of cost averaging. You can read in detail about the benefits of SIP here. Generally, a technique used for mutual funds, SIP can also prove to be advantageous across asset classes.
However, there are certain mistakes that investors must avoid while opting for the SIP route for their investments in order to maximise their gains and minimise their losses.
SIP Mistakes To Avoid While Investing
1. Not Setting Specific Goals
First and foremost, it is important to closely assess one’s investment capabilities and goals. Deciding if the amount is going towards one’s new car, house, child’s education or marriage can help an investor pick an asset class, time horizon and amount accordingly.
2. Investing Too Much Or Too Little
Before beginning an SIP, one must assess one’s financial capabilities to ascertain that the amount he/she has picked isn’t too high or low. If you pick an amount too high, you might struggle to keep the momentum in the future and also face a liquidity crunch during times of emergency. Conversely, if you pick an amount too low, you are likely to take longer to reach your goal and also lose out on the power of compounding.
3. Ignoring Market Risk
All investments have inherent risk. Overlooking these can take a massive hit on your returns. Analysing the underlying market and asset risk will help strike a balance between your risk tolerance and financial goals and make the most of your investments.
4. Not Reviewing Your Portfolio Regularly
While SIPs are done keeping in mind a long-term view, by not reviewing your portfolio regularly, you can lose out on potential gains. Periodic evaluation will help you ensure that your portfolio is in line with your risk tolerance and financial objectives. In case a particular asset isn’t performing well, you can make the necessary adjustments to your strategy.
5. Not Diversifying Your Portfolio
Diversification is critical to any investment, even while opting for the SIP route. Invest in a mix of debt and equity funds to reap the benefits of both asset classes.
6. Opting For Dividend Plans Instead Of Growth Plans
In the case of a dividend plan, the investor gets the returns in the form of dividends, periodically. Whereas, in the case of a growth plan, the return is reinvested in the asset. Growth plans help you make the most of your SIP strategy, wherein both the initial investment and return get compounded.
7. Opting For A Short Time Frame Or Stopping SIPs During Market Volatility
An SIP should be kept for at least 10-15 years for it to be able to even out the market cycles, let the power of compounding work and generate wealth for you. Exiting earlier than a pre-determined time can also attract an exit load which can further reduce your overall returns.
8. Starting Too Late
The earlier you start investing through SIP, the more time your money has, to grow and benefit from the power of compounding. This in turn helps to reap better returns, especially over the long term.
Consider this:
Amount | INR 5,000 | INR 5,000 |
Rate of Interest | 12% | 12% |
Time | 10 yrs | 20 yrs |
Invested Amount | INR 6,00,000 | INR 12,00,000 |
Estimated Returns | INR 5,61,695 | INR 37,95,740 |
Total Value | INR 11,61,695 | INR 49,95,740 |
9. Not Being Disciplined
Investing through SIPs calls for a certain level of discipline and commitment. One must not panic during market volatility but stick around long enough for the returns to even themselves out.
Conclusion
Investing through SIP allows an investor to experience financial flexibility and make the most of the power of compounding. However certain common mistakes discussed above should be avoided to make the most of this investment strategy.
Frequently Asked Question On Systematic Investment Planning Mistakes
1. Is SIP and mutual fund the same thing?
No. A mutual fund is a professionally managed investment vehicle, which pools money from investors to invest in a variety of securities, such as stocks, bonds, and short-term debt. On the other hand, SIP is one of the ways of investing in mutual funds. Another route is lumpsum investments. You can read in detail about the differences between the two here.
2. Can SIP help in saving tax?
In case you use the SIP route to invest in a tax-saving ELSS mutual fund you can claim tax deductions of up to INR 1.5 lakh under Section 80C.
3. Does SIP have an exit load?
The exit load depends on the mutual fund. If there is an exit load specified for the fund, then it is applicable also in the case of an SIP. Most equity funds have an exit load of around 1% if redeemed before a year from investment and no exit load if redeemed after a year. The exit load is calculated upon the value being redeemed.
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