It is often said, you don’t need to make mistakes to learn from them. This perfectly applies to mutual funds. With time, SIPs have emerged to be the mostpreferred and most effective tool of investment in the market. This claim is cemented by the fact that an SIP has all the benefits that come with investing in other mutual funds withfeweror buffered risks. This makes wealth creation easylike never before.
It is said that with proper financial planning and strict investment discipline, wealth can be maximised.However, not many investors make it to the wealthy end. There can be several reasons behind this. While the market is unpredictable, our own actions can prove to be detrimental to our dreams.
Knowing what SIPs can do for us is awareness at its best, but learning what shouldn’t be done while investing in the market makes all the difference.
So without further ado, here are a few fundamental errors that investors tend to make when it comes to SIPs:
- Choosing a large investment amount
What sets SIPs apart from lump sum investment is the amount you can invest. Theinstalment amount can vary according to the financial standing of an investor.
However, if you commit a large amount to your monthly SIP, chances are that you might miss a couple of instalments in a year owing to high expenditure, lack of savings or financial problems.
You might invest the missed instalments in the subsequent months, but would this generate the same returns?
The return for those months is lost.
To choose the ideal investment amount, using SIP calculator is highly recommended. Doing so can help you calculate a manageable monthly amount that won’t disturb your finances. Choosing an amount that is too high or too low can lead to an unwarranted financial pressure and also affect your investment’s performance in the long run.
- Selling off when the market hits a low or Panic Selling
Looking at the persistent trends, it seems quite natural for an investor to invest in rising markets and withdraw from falling ones. And, though this is the classic trend, it doesn’t necessarily bring the desired benefits. It might possibly be the worst mistake.
Contrary to the above belief, investors should look at falling markets as an opportunity to invest more. This way, they can bag more units while benefiting through rupee cost averaging.
Short-term falls don’t have much effect on long-term investments. However, selling off your assets due to such a fall can erode your financial goals. Withdrawing your funds in a hurry would only lead to profound regret later.
- Choosing Dividends over Growth
Before understanding these options, one must understand the working behind compounding.
Compounding is very similar to the concept of compound interest we all have studied in the middle school. In this concept, the interest is offered on both the principal and the previously accumulated interest. Compounding follows the same principle.
While choosing a fund to invest in, two options are provided to the prospective investor: Dividend option or Growth option. Before understanding the implications of both these options, let’s first grasp the semantics.
Dividend option allows you to withdraw from your SIP wealth pool during the plan tenure, while in growth option, no dividends are paid and the investment remains untouched till the end of the opted tenure. Also, there is a Dividend Distribution Tax (DDT) which is payable on dividends for debt schemes. DDT is charged at the rate of 10% on equity-oriented mutual funds. The DDT is not taxed in the hands of the investors. But, DDT might reduce their return on equity funds. Long term capital gains over Rs 1 lakh on equity funds will be taxed at the rate of 10%.
You are set to gain more with Growth option as the corpus continually receives the benefit of compounding. In Dividend option, the effect of compounding diminishes the second you withdraw a sum, thus reducing your net takeaway.
- Not boosting the SIP
There are times when we end up with more spare funds than usual. More often than not, we end up spending the entire amount on mundane things that don’t align with our long-term goals. Also, you can add to your SIP amount with an incremental increase in your earnings. Contributing more to the fund can help to boost your SIP investment.
Availability of surplus funds allows you to add to your existing SIP investment through tactical allocation of lump sum investment. It can bring the average unit cost further and ensure potentially higher returns in the longer term. It is known as Step-up SIP.
So, do invest your surplus funds in your on-going investments.
SIPs have become the sure-shot bet to achieve financial goals owing to flourishing stock markets and dull performance of other asset classes. However, blindly investing in an SIP will not take you anywhere. If you really want your assets to fetch good returns, you will have to keep a close eye on the market. Now that you know about the most common mistakes that many SIP investors make, you can learn everything that can aid you in creating wealth. Happy investing!!