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Systematic investment plan (SIP) is envisaged to generate a higher yield over the long-term through disciplined investment preferably in small amounts at frequent intervals. Unlike lump sum investment option, SIPs enable to build a wealth portfolio without hampering your financial commitments. The power of averaging and compounding make SIP mutual fund a smart investment option. But, there are certain mistakes that can get you caught on the wrong foot and elude you from extracting maximum advantage of SIPs. Mistakes and solution for the same are discussed below.
Deciding high investment amount
There is always a tendency to get carried away by the benefits that SIP presents and, due to this, you end up committing high investment amount without assessing your existing and future financial capabilities. You might afford a big investment when being single. But it becomes daunting when you have a family.
Set an amount that you can afford after properly evaluating your existing and future financial conditions by calculating salaries, expenses as well as contingencies.
Going for a shorter tenure
Often people look to get the benefits in the shorter investment tenure of say 1-2 years. But with the volatility of the market, chances are minimal that you get the desired returns in such shorter duration.
One must make sure to go for a longer tenure to optimally utilize the averaging benefits of the SIP.
Stop SIP in falling market
The volatility in market often makes investors worried and thus forces them to discontinue their investments like SIPs.
You should not be overly concerned about the market as the SIP investments are dispersed over different months. Due to this, the adverse effects of the wrong investment time are greatly reduced. Moreover, you can get more SIP units when the market sentiment goes down due to low price.
Forget after investing
Often investors forget to monitor and renew SIPs after they invest in the same.
Regularly assess your investment portfolio, remove the non-performing mutual funds and replace the same with the ones likely to offer high returns.
Opting for dividend over growth
With an eye firmly set on short-term gains, most investors often prefer dividend option and withdraw a portion of the earned income via SIP on a regular basis, thus defeating the power of compounding that this form of investment is renowned for.
Make sure you reinvest the dividend to receive compounded wealth in the end.