Equity mutual fund schemes have seen an addition of about 43.44 lakhs new SIPs during 2015, a nearly 66% increase on a year-on-year (y-o-y) basis, says an article published in The Economic Times in January 2016. If you are involved in share trading in India, then you must aware of SIPs. Systematic Investment Plans let you make regular contributions towards a mutual fund (MF) instead of a heavy lump-sum amount in a particular year. The biggest advantage of investing through this channel is that you get to start with as less as Rs 500. This has opened up newer investment avenues even for those with less surplus cash.
Investment Mistakes to Avoid
Systematic investment plans are considered to be an effective tool for wealth creation. It comes with the added advantage of compounding and rupee-cost averaging. Although it has huge plus points, investment errors can limit the power of an SIP and ultimately the expected returns. Here are some mistakes that you must avoid while making share market investments through SIPs.
1. High Amounts of Investing – Lured by the benefits of the plan, you might end up committing to a higher amount as monthly contributions. However, this might prove to be a problem when you are unable to pay the same in future due to increased financial responsibilities. Therefore, you must analyse not only your present financial condition but also future surplus cash flow, responsibilities and goals in order to decide the optimum amount that you can contribute towards this scheme every month. You can increase the said amount anytime you wish to.
2. Investing for a Short Time – You can best reap the benefits of SIPs only through long-term investing. Durations of even one year could be too short to tide over any volatility in market movements.
3. The Scheme is Best for Small Investors – Although the scheme lets you contribute towards a mutual fund with as little as Rs 500, that does not imply that it is only for small investors. You can invest in the scheme with Rs 5,000 or any other amount. The basic essence of the scheme is consistency and not volume.
4. Discontinuing the Scheme in Bearish Markets – You might discontinue your plan driven by market volatility. However, through an SIP, you can benefit even during falling markets. Rupee-cost averaging lets you buy more units at the same price when the prices are low and vice versa. Because investments are made at regular intervals, this decreases the average cost of investment in the long-run.
5. Choosing Dividend Over Growth – A lot of people may choose to benefit through dividends. However, the longer you leave your money invested and larger you invest, the more you gain. Thanks to compounding.
6. Not Monitoring the Scheme – Every mutual fund behaves in a different manner, which makes it essential to monitor and act accordingly when it comes to SIPs. You cannot invest and forget and then expect to reap high returns.
If you have signed up for portfolio management, you can ask your fund manger about investing through SIPs.