Systematic Investment Plan, also known as SIP, is a tool to invest in mutual fundsthat can turn small, insignificant amounts into huge ones. SIP investment is envisaged to generate higher returns through disciplined investments over time. It does not matter what your financial situation is currently. Just invest regularly, and you are bound to reap the benefits of SIPs along with mutual fund benefits. However, there are a few common blunders that should look out for whiling investing in mutual funds via SIP mode. These blunders act as a roadblock for investors to reach their goals. Let’s understand these mistakes:
- Making rash decision to invest big
Investors often find themselves in a pickle when they get carried away by the benefits offered by SIP investments and decided to go big and invest a high amount without analysing their current and future financial requirements and capabilities. Unable to match these numbers often leads them to stop their SIP investments, a practice frowned upon by experts.
- Timing the markets
Market timing is a strategy where your buying and selling decisions are taken by predicting future market movements. Not to mention, this is a skill not everyone can master. On the plus side, one of the benefits of investing via SIP is that you don’t need to time the market, thanks to a concept called rupee cost averaging. However, several investors still stop or pause their SIP investments as soon as the equity markets start correcting. Investors should refrain from indulging in this habit.
- Thinking short-term
When you invest for a longer duration, you reap more returns thanks to the power of compounding, also known as the eighth wonder of the world. Compounding generates earnings from your earnings, i.e. your returns are re-invested to gain more returns. Long-term investments have a better chance of facing market volatility than short-term investments due to rupee cost averaging.
- No cushioning
A lot of investors in the heat of the moment go all in and invest all their savings without considering future unforeseen circumstances. This could be a deadly mistake as you might end in a loan trap if an unfortunate emergency does occur to you or your family. You should always invest only a certain percentage of your investments and preserve the remaining for any emergencies.
- Not linking them to your financial goals
Numerous studies and research has proven that it is important to start off with your SIP investments in an ad hoc manner but instead linking them to clearly defined,measurable and specific goals. Your goals short be SMART goals (Specific, Measurable, Attainable, Relevant, and Time-bound). In fact, anecdotal studies suggest that SIPs with a random amount (such as Rs 3862) tend to continue for a longer tenure than SIPs with rounded-off figures (such as Rs 4000). This is because the former was most likely started after a back-calculation and due diligence to achieve one’s target amount. If you want to calculate the exact figure required to achieve your goals, you can use an SIP calculator for the same.
All in all, always link your mutual fund investments to your goals and do not make a rash decision to invest all your savings. Try to invest for a longer tenure and refrain yourself from pausing or stopping your investments. So, what are you waiting for? Invest in mutual funds online today and yield higher returns over time. Happy investing!