Avoid these 3 mistakes while investing through SIPs
Systematic Investment Plans (SIPs) are considered an effective method of investing in mutual funds. They allow you to invest a fixed amount either weekly, monthly or quarterly based on your investment budget. You can enter the market whenever you have the necessary funds without having to time the market. As you enter through different phases of the market cycle, you average the purchase cost and lower your risk. Often new investors tend to err while investing in a SIP.
The article lists the three common mistakes investors make when they invest in mutual funds via SIPs and how you can avoid them.
- Choosing an inadequate SIP amount
You can start your mutual fund investment journey via SIPs for as low as Rs.500. While it is fine to start with a token amount as you are still treading unknown waters, it may not be enough. With time, you can raise your monthly investment amount to match your financial goals.
For example, assume you are saving to purchase a property in the next ten years. If the expected rate of return is 12%, your SIP amount would have to be Rs.9,000 per month to build a corpus of Rs.20 lakh within a decade. If your SIP amount is only Rs.500 or Rs.1,000, it may not be enough.
- Not picking the right schemes
Investors who know what is a mutual fund are also aware of the different types of mutual funds available. With several options, you could end up choosing the wrong scheme. Or, you may choose a scheme based on its recent past performance without taking into account other factors and risks involved.
For example, you could invest in sectoral funds via SIPs. But by the time returns start to come in, the sector may be out of its golden period.
- Investing for brief periods
Generally, mutual funds are meant to create wealth over a long period. A common mistake that most novice investors make is to withdraw their investments when the market enters a bearish phase. Or, invest for too short periods such as one year or lesser. Let us understand how this can impact your earnings.
Mr. A invests Rs.5,000 monthly for ten years at 12% interest rate. After ten years, his corpus amount would be Rs.11.09 lakh. Mr. B invests the same amount at the same interest rate, but for fifteen years. His corpus would be Rs.23.57 lakh. Though Mr. B invests 50% more money than Mr. A, his corpus is more than double of Mr. A’s investment because of compounding. ShouldMr. B stop investing after ten years and let his money compound for five more years? If yes, he would still have a corpus of Rs.19.55 lakh at the end of fifteen years.
SIP in mutual fund can be an excellent way to create more wealth. SIP investments demand discipline and focus. You can avoid the mistakes mentioned above and think long term when investing via SIPs. It can give you more scope to build wealth and reach your financial milestone.