Let's look at seven SIP investment mistakes you may want to avoid to make the most out of your SIP investments.
Systematic Investment Plans are a convenient and straightforward way of building wealth in the long run, and SIP only works if you keep investing regularly in a disciplined manner. However, some investors fail to maximise the SIP returns due to basic errors.
Let’s look at seven SIP investment mistakes you may want to avoid to make the most out of your SIP investments.
1. Setting Unrealistic Goals
A common mistake most investors make is setting an unrealistic goal which cannot be monetised within reasonable time-frame. For instance, you may want to retire early. But there are several factors to consider, such as defining the retirement age, the target amount and what you will be doing post-retirement. Setting an achievable and not-too-ambitious goal can help your SIP meet the target based on the income levels to support the plan.
2. Choosing the wrong scheme for the wrong goal
In their quest for very high returns, some investors tend to select schemes that may not fit their risk profile. Then they end up constantly worrying about the market and portfolio volatility. Hence, always look into your specific financial goal, time horizon and your risk appetite to select the suitable scheme.
3. Investing in Equity SIPs for a short duration
When investing in equities, it’s recommended to stay invested for the long haul. To accomplish goals that have a short term duration, you may want to invest in schemes that ensure stability and high liquidity like liquid funds, or debt funds with lower / shorter duration.
4. Having a high SIP amount
There is no maximum limit or amount to start an SIP; you can invest as much as you can. However, you should remember that you will have to stick to the SIP amount, until the investment tenure. Hence, before starting the SIP, evaluate and decide the amount that is affordable to you. Use an SIP calculator to know your budget and risk appetite and determine the right amount for the length of the tenure.
5. Setting a minimal SIP amount
While most mutual fund schemes allow you to invest with a bare minimum of ₹500, maintaining the minimal amount throughout the SIP tenure may not be a good idea. That’s because a literally low SIP amount may not be able to fund your actual goal, such as your retirement, supporting a wedding or meeting your children’s educational expenses, etc. The right way to set a SIP amount is to define your goals and assign a value with an assumed reasonable annualised rate of return. Use the SIP calculator to determine the result and set up a suitable SIP amount towards it.
6. Cancelling the SIP during market volatility
Investing in equity funds works best with a clear long-term timeline and a target amount in place. But celling the SIP during market corrections can impact your investments negatively. Have an investment timeframe flexible to accommodate market volatility and stay patient despite the ups and downs of the market.
7. Reviewing SIP performance at short intervals
Reviewing and rebalancing your investment portfolio must be akin to a hygiene check. Having a very short gap when reviewing and rebalancing your portfolio will not give you the desired results.
Setting up an SIP is intelligent investment behaviour; it streamlines your financial life. It eliminates the burden to decide when to make each investment and allows you to follow through on your commitment to invest in the mutual fund scheme before you even get a chance to spend it.
Having a financial advisor assist you in setting up an ideal SIP portfolio can help you match your goals, risk profile and time horizon with the choice of your mutual fund investments.
(By Renjith RG, Associate Director at Geojit Financial Services)