How many times have you been told about the power of compounding that turns even the smallest of systematic investment plans (SIPs) into an enviable corpus that can last a lifetime? Take for example, a simple monthly SIP of Rs 10,000 for 30 years will yield you a corpus of Rs 3,529,991.38 at 12 per cent interest.
However, market volatility often prevents people from continuing with their SIPs or encourages many to cash out their investments for fear of incurring losses. This behavior can be attributed to ignorance about how SIP investments work and a lack of understanding of how small investments, if made unchecked over a long period, can help people achieve their financial goals.
Many invest in mutual funds through SIPs to invest regularly and mitigate the impacts of direct equity investment. AMFI statistics highlight that the number of new SIPs rose to 23,24,070 in December 2022, suggesting an increase. The value of investments in SIPs rose to Rs 13,573 crore in December, up from Rs 13,306 crore in November 2022.
However, prolonged bearish phases like the one in 2020 discourage investors from continuing to invest.
Some are more focused on building an emergency fund in the event of a likely recession in 2023 and have relegated their SIP investments to the back burner.
Let us look at some of the common mistakes that investors make while investing in SIPs.
Investing too much or too little through SIPs
Many people mistakenly believe that it is better to start investing a large sum of money on a regular basis, irrespective of their financial status, age or financial goals. It is okay to invest large sums when you are young and have no responsibilities. However, when you start a family, it may not be helpful to continue with high denomination SIPs. The impact of loans and increased financial responsibilities can affect regular SIP investments. At the same time, avoid choosing an extremely low installment amount. A small sum will not increase your wealth quickly.
Consider your financial situation before deciding on a fixed amount to contribute to SIP through the direct route. Evaluate the funds thoroughly, keeping in mind future expenses, inflation costs, life goals, etc.
Opt for a short investment horizon
A common mistake that many people make is choosing a short-term SIP investment. They expect a quick payoff and choose a three-year investment timeframe. Furthermore, the abruptness of macroeconomic factors has seen many investors opt for the “keep it short and sweet” route when it comes to deciding how long they want to stay invested. However, they fail to recognise that by selecting a shorter timeframe, they are exposing themselves to a higher risk of market volatility and loss. Accumulation of profits in a short period is also highly unlikely.
Invest for a longer period if you want to accumulate wealth over time. Remember that rupee cost averaging of SIPs over multiple market cycles has a much lower risk of loss and contributes to long-term wealth creation and inflation-adjusted returns. SIPs should be invested for at least three years for medium-term goals and seven to eight years for long-term goals.
Stopping SIPs midway due to fear of volatility
Fear and panic grip investors as a result of a fund’s poor performance during market volatility. As a result, they stop their SIPs abruptly. Any short-term volatility can affect the fund’s performance, but if you have chosen the right mutual fund, do not get influenced and be patient. Investment in mutual funds can only be successful if done over a long period of time due to the power of compounding.
When the market is down, you should continue with your SIPs because you can buy more units for the same price. This reduces the overall cost of investment in the long run. In short, you make the most of the situation.
Ignore your investments
There is no way you can invest and then forget to check the performance of your investments. However, this does not mean that you should check your investments every day. Looking at your investments on a daily basis and expecting to see growth in them every day is like sitting in a forest and watching the plants grow into big, leafy trees.
Many people don’t bother to look at their investments once they’ve invested money in them. This indifference towards investments can backfire in the long run. Every fund performs differently, and even the strongest mutual fund managed by the best fund manager requires oversight. If you don’t monitor and review them, you may miss out on opportunities to grow your capital faster.
You should review, evaluate, renew or rethink your investments periodically based on the performance of your investment portfolio and replace poorly performing mutual funds with those with a high probability of good returns at least once a year.
Underestimating the option of moving up a category
Not considering a gradual increase option can be a hindrance to growing your capital to the desired level. Due to the power of compounding, SIP investments help you achieve your financial goals over time and provide inflation-adjusted returns. So, if you receive a raise or bonus, increasing or incrementing your SIP installment annually at a fixed rate will help you accumulate a larger amount.
Choosing the dividend option instead of the growth option
Many people would err on the side of choosing the dividend option to earn income through regular partial withdrawals if they are looking for long-term growth. This is unfortunate because it goes against the main benefit of SIP investments, and mutual fund companies and their schemes do not guarantee regular dividends. As a result, the compound growth of your initial investment (the process of wealth creation) does not reach its full potential.
While in the growth option, your initial amount is reinvested multiple times and compounded exponentially to increase your wealth. Choose the growth option to receive compounded wealth and eventually achieve your goals.
There is no better way to park money in mutual funds than through gradual and regular SIP investments. Investing in mutual funds through SIP can help you achieve your financial goals in the best possible way. It is an excellent option that, apart from increasing wealth, helps in developing patience, focus and discipline. Apart from ensuring regular SIP investments, you must be careful not to succumb to rumours and refrain from making unwanted mistakes that delay your journey towards financial independence.
