Thanks to flourishing stock markets, systematic investment plans or SIPs have emerged as an effective investment avenue. By investing a certain amount each month, SIPs offer you the golden chance to enhance your wealth over time. However, in order to maximize your returns and attain your financial goals, you need to make SIP investments carefully. There are numerous fund houses selling various mutual fund investment schemes, but that doesn’t mean you can pick any of them. If you are not careful enough, you may be disappointed by the returns. If you want to make gainful SIP investments, be mindful of these mistakes while choosing SIPs: -
Investing Too Little
Most of the first time investors tend to invest small amounts like Rs 500 - Rs 1000 per month since they want to test the investment first. Although it’s a good practice to start out with small investments, one should gradually increase the amount as you get comfortable with investing in SIPs. For e.g., If you plan on saving Rs 20 Lakh in a period of 10 years, sticking to your SIP of Rs 1000 will be of no help. To achieve that goal, you will eventually have to increase the SIP to at least Rs 9000 per month.
Choosing The Wrong Schemes
Many investors end up getting disappointed due to their wrong choice of SIP scheme. This happens mainly because investors choose schemes based on the fund’s recent performance and as opposed to its long-term performance. Furthermore, some investors also bet on sectoral funds without comprehending the risk-reward ratio. So, by the time you accumulate a substantial amount of investment, the sector may be out of favor.
Investing for Very Short Periods
SIPs generally offer great returns over a long period of time. However, if you choose to invest in SIPs for a short period of time, you will not get a high return because a short-term investment does not give you the benefit of compound interest. The longer your SIP term, the higher will be your gain. So if you have invested in a six month or one-year SIP, it’s advisable to extend it.
Picking Dividend Option Over Growth Option
When you choose the dividend option for your SIPs, you end up reducing your corpus which in turn reduces the compounding effect. On the other hand, when you choose the growth option, dividends are not paid out. Hence the corpus continues to grow over time, yielding more interest. So in case you have opted for the dividend option, you can change it to growth option or dividend reinvestment option.
Investing Beyond Your Means
While it’s true that a larger corpus will earn you higher returns, stretching your limits too much is not a good idea. If you initially commit to a huge amount of SIP investment for each month and are unable to follow up later, your returns will be affected. Hence being overly ambitious regarding SIPs is also not a good idea. Hence you should decide on an amount that you are comfortable with over a long period of time. In other words, your SIP investment should not feel like a burden.