A systematic investment plan (SIP) allows disciplined investments (recommended in small amounts) at regular intervals (recommended monthly) to yield high returns over a long period of time. Rather than investing a lump sum amount (usually unaffordable for many) in an investment option, SIPs help to build wealth gradually without hurting your overall financial commitments. Not to forget, it accompanies the power of averaging and compounding which further makes it a smart investment option.
However, you might wonder why investors have mixed reviews about SIPs? There are some common mistakes that investors make and fail to extract the maximum advantage from SIP investment as listed below.
Deciding High Amount for Investing
Excited by the benefits of SIP, many investors commit high investment amount without calculating their present and future financial capabilities. If you are single at present, you might be able to afford a big amount, which might become difficult once you have a family.
What to Do?
Evaluate your financial condition (present and future salaries, expenses and contingencies) and set a realistic amount for monthly SIP investments.
Investing for 1 Year
Many investors try to reap the benefits of SIP through single year investments. Considering the volatile nature of market, it is an extremely small duration for the plan to work in your favour.
What to Do?
SIPs are the best investment option in fluctuating market scenario as they help you benefit due to averaging. Investing for a longer time period helps you benefit optimally from SIP investments.
Discontinue SIP in Falling Market
Market volatility drives the decision of many investors who usually discontinue their SIPs when the market falls.
What to Do?
The market mood should not influence your investment commitments in SIP. Due to investment being spread over different months of the year, the ill-effects of ’wrong investment time’ are reduced considerably. Plus, when market sentiment is down, gain by getting more SIP units due to low price.
Choosing Dividend over Growth
Counting on the short-term profits, investors usually prefer taking ’dividend’ option to withdraw a part of the earned SIP benefits regularly. It actually defeats the amazing power of compounding that SIPs are known for.
What to Do?
Allow the dividend to be reinvested to gain compounded wealth at the end.
Invest and Forget
Investors most of the times invest in SIPs and forget to monitor and renew it. Considering that every mutual fund is bound to perform differently, you should keep a watch on your investments.
What to Do?
Evaluate the investment portfolio frequently and replace the non-performing mutual funds by those with high probability of good returns.
Your hard-earned money should follow the right investment approach to grow. By avoiding these mistakes, you are empowered as a smart investor with the right insight for handling SIPs.