It is better to learn from other people’s mistakes rather than committing them. This article on systematic investment plan or SIP will point out a few mistakes that readers can avoid.
SIP means making small investments over a period and then reaping the dividends. You don’t need to be a big businessman to invest regularly. Even if you have a limited source of income, you can still invest and make good profits after a few years. However, many investors commit very simple mistakes and lose out on opportunities.
- Investing big- As said earlier, you don’t need to be a wealthy businessman to invest in a fund or any other instrument. You can even make a start by investing Rs. 500 per month.
However, some investors first accumulate a substantial amount of money and then invest it. After a few months, they either forget investing or do not have the same amount of money. Clearly, they missed out on important part of the SIP strategy- start small but be regular. Had they followed this strategy, the same investors would have posted decent profits by the end of a particular period.
- Not for small investors alone- A common myth in the finance and investment circles is that SIP is only for small investors.
No, this is not a fact. The principles of SIP stay the same irrespective of the financial status of the individual. Therefore, if you can set aside Rs. 50,000 per month for systematic investment, then you get proportional returns on it.
The basic principles of SIP are – time value of money, rupee cost averaging and compounding and these remain the same whatever be the money invested.
- Investing for short term- If you are thinking of investing for short term, then you are committing a serious mistake; you are losing out on long term opportunities in the process.
For example, if you invested Rs. 5,000 per month for 5 years ( 60 months), then you can earn Rs. 4.12 lacs at rate of interest of 12%. If you expanded your time period to say 25 years, your total earning would be Rs. 1.77 crores, assuming the rate of interest remains the same. Therefore, invest for a longer period and reap higher dividends.
4.Divest at the right time- Many investors buy units when the market is bullish and divest them when the market declines or begins declining. This is a wrong approach.
Investors should rather enter the markets when they are on the decline; this way their NAV acquisition costs are low. When the market rises, then they can sell off their assets and make profits.
- Choosing dividends over growth- Another common mistake that many investors commit is choosing dividends over growth.
Growth takes place because of the compounding effect. When you invest Rs. 5,000 per month regularly for say 5 years, it becomes Rs. 1 lac plus at an assumed rate of interest of 12 %. It becomes such a big money because at the end of every fiscal year, interest is calculated on the interest generated previously. This is called compounding.
But when you withdraw money because of dividends, you lose out on this compounding value of money.
- Not boosting your SIPs- Most investors get extra money at some point of their lives. Many of those do not boost their SIPs with that extra sum and just spend it. Had they boosted their SIPs with a lump sum once a while, those investors would have posted even more profits.
- Divesting now to add later- Some investors withdraw from their SIP fund before maturity to fund their needs. Investors need to understand that when they withdraw that small part of money, they also lose out on the profits that that particular sum would have generated. Avoid withdrawing money from your SIP fund to the extent possible.
It is not necessary to be wealthy to participate in SIP activities. Similarly, SIP is not meant for the small investor alone. The trick to posting good profits is to invest regularly. Click here to know more about the best SIP plans to make your learning curve steeper.