Common Mistakes to Avoid to Make the Most of the SIPs
Have you been meaning to invest in mutual funds but don’t feel confident investing in a lump-sum amount. With a SIP (Systematic Investment Plan) you can get exposure to the markets, as well as make periodic investments instead of a lump-sum amount.
A SIP is a financial instrument that helps you make balanced, systematic investments. It is an investment vehicle that helps you invest in mutual funds through small periodical payments. Besides, diversification of funds will help you make the most of your investment. Also, it is very affordable, starting at a mere ₹100.
But before you buy it, let’s take a look at the list of mistakes that should be avoided to gain the full benefit of investing in SIP. To find out more, read on.
Considering Funds with Lower NAV as Cheaper
Investors often mistake funds with lower Net Asset Value (NAV) to be cheaper, investing in them in the hope to generate high returns. However, a fund’s price is not regulated by its NAV. A fund’s NAV depends on multiple unrelated factors. A well-managed fund grows at a better rate, irrespective of what its current NAV is.
Choosing an Inadequate SIP amount
It is very important to choose the right amount when investing in a SIP to reach your goal. Choosing an incompetently low amount may result in an unproductive investment. You can start by investing a small amount. However, it’s important to boost it to achieve your financial goal. Moreover, you should keep a watch on your investment portfolio so that you understand what needs to be done.
Investing for a Short-term
SIPs perform best when you keep them invested for a longer period of time. The primary objective of this type of investment is to create wealth in the longer run. Some people expect to earn a reward in a relatively shorter period. Lacking patience when investing in SIP often leads to investors redeeming their funds prematurely.
Not opting for a Growth Plan
One of the common mistakes made by the investors is opting for the dividend option over a growth plan. Investors often get enticed into the prospect of accruing a regular income. However, not realising that this dividend is paid from their own AUM (asset under management). This hampers the investment growth as they keep losing funds from their investment. A growth plan on the other hand helps maximise the benefit of your SIP investment.
Giving Up SIP during Bearish Market Conditions
Many investors give up their SIPs during drastic market corrections or bearish market situations. Fearing more loss, investors often stop their SIPs. However, it’s a big mistake because this is the time when quality equities are available at attractive valuations. Continuing with your SIP will result in lower maintenance costs and the opportunity to accumulate wealth when markets rise again.
SIPs are a great investment tool. It can help you realise your financial goals over a pre-decided timeline. However, it is important to do your research, such as understanding what NAV is, and educate yourself on the subject before you go ahead and buy a SIP.