Avoid these 3 mistakes while investing through SIPs

Avoid these 3 mistakes while investing through SIPs

Mutual fund systematic investment plan (SIP) has become the ‘sure-shot’ answer to all investment needs, thanks to flourishing stock markets and dull performance of other asset classes such as bonds, gold and real estate. Many think that by signing up for an SIP in an equity mutual fund scheme, they will save money to achieve their financial goals. While the success stories want you to believe it, here are three scenarios wherein one may fail to achieve his financial goal even if he opts for an SIP in equity mutual funds.

Investing too small amount

Many investors want to go for SIP, but find it difficult to invest ‘large’ enough sum each month. Especially the first timers want to taste the waters with an SIP of Rs 1000 per month. Nothing wrong in that. Even Warren Buffett has warned us against testing the depth of waters with both feet.

“It is fine to start with a token amount, but once you become comfortable with the regular investments, it is time to raise the investment amount per month in line with your financial goals,” says Abhinav Angirish, founder and CEO of investonline.in, a mutual fund distribution entity in Mumbai.

Let’s understand with an example. If you want to save a sum of Rs 20 lakh over next ten years for the down payment of your dream home and you expect a return of 12 percent from your investments, you should be investing Rs 9000 per month. If you hang on to your SIP of Rs 1000, it will be of no help.

Try to use a SIP planner to understand how much money will you get with your existing SIP.

Picking wrong schemes

A lot of experts have written about picking the right schemes. However, there are still many who land in trouble when they pick their horses. Many a time, investors end up picking schemes based on their recent performance or bet on some sectoral fund without understanding the risk-reward involved. “Don’t bet on sectoral funds in SIP. By the time you accumulate sizable chunk of investment, the sector may be out of favour,” says Harshvardhan Roongta, chief financial planner of Mumbai-based Roongta Securities.

Instead stick to diversified equity schemes with long term performance track record. If you cannot choose the right schemes that cater to your needs, you can consider taking expert help. “Look for SIP returns and do not get swayed by point to point returns,” Roongta adds.

Investing for very short time periods

Most of the times, investors are seen at two ends. Either they use some ‘investment apps’ on their mobile phone and sign in for a perpetual SIP or they end up signing for the minimum six months to 12 months SIP. If you have signed for a perpetual SIP, you are supposed to review the performance at least once a year.

In case you have signed for a one year SIP, you are expected to review it and extend it. If possible you should be ideally increase the SIP amount.

SIP done for short-term may not be of much help as you do not allow your money to compound. Longer your stay, more you mint. Let’s understand this with an example.

Suresh invests Rs 5000 per month at 12 percent rate of interest for 10 years. He takes home a sum of Rs 11.09 lakh. Ramesh invests Rs 5000 per month at 12 percent rate of interest for 15 years and he takes home a sum of Rs 23.57 lakh. Here Ramesh invests 50 percent more money than Suresh, but he takes home more than double the money invested by Suresh.

Even if Ramesh does not invest after 10 years of monthly investment of Rs 5000 per month and let his money compound for five more years, he walks away with a sum of Rs 19.55 lakh at the end of the fifteenth year.

If you really want to see your money grow, you should be starting with your financial goals. Decide the amount you should be investing per month and then sign up for SIP in schemes that have a long-term track record. Be realistic with your expectations. Do review both your financial plan and your mutual fund SIP.