A systematic Investment Plan or SIP is an investment tool that helps investors to turn their small, insignificant investment amounts i.e., invested on a regular basis into significant investment corpus. These investment tools are designed in a way that helps investors to earn substantial returns through regular, systematic, and disciplined investments over a given period.
Irrespective of the financial condition of any investor anyone can invest in SIP due to the low minimum investment amount required to invest in mutual funds via SIP. Essentially, an investor can invest Rs 100 per month in mutual funds through the SIP mode of investment. Are you convinced to invest in mutual funds via SIP? Sure, you are. But before you invest in SIP, you must be careful to not commit common SIP blunders. In this article, we will look at these common SIP mutual fund blunders committed by most retail investors.
Here are some common SIP blunders that you must strive to avoid when investing in SIP mutual funds:
- Making impetuous investment choices: Investors often end up in a sticky state of affairs when they get carried away by the benefits of SIP mutual funds and choose to go big. These investors often end up investing a substantial SIP investment amount without examining their current financial liabilities. Unable to meet these huge SIP investment amounts in the future, these investors are often forced to stop their SIP investments.
- Timing the markets: You would hear several financial experts advising investors against the idea of timing the markets. Market timing is a tactic wherein several investment decisions such as the right time to enter or exit the markets are influenced by predicting the future market movements. Investors often end up catching the bear market phase in an attempt to enter the markets at the bull phase. This is because it is almost next to impossible to correctly predict the markets. As a result, investors often advise their clients to invest in mutual funds via SIP mode as one does not have to time the markets in the case of SIP investments.
- Investing for a shorter duration: Investing for a prolonged duration of time allows investors to enjoy the benefits of the power of compounding. Compounding allows investors to earn additional returns on their investments as the returns are re-invested to make returns on their own. The power of compounding is directly dependent on two factors – the investment horizon and the investment amount. The higher the investment duration and the investment amount, the more are the returns earned on mutual fund investments. Additionally, long-term investments tend to perform better against market volatilities than short-term investments.
- No cushioning: Several investors go all in without analyzing their current financial position and end up investing all their hard-earned savings in the heat of the situation. This might prove catastrophic to an investor’s portfolio and an investor might even end up in an unfortunate situation of the debt trap. Hence, investors advise investors to invest in mutual funds after careful analysis of their financial goals rather than investing on an ad-hoc basis.
To conclude, ensure that the objectives of the mutual fund scheme you choose to invest in, aligns with your financial objectives, risk tolerance, and investment duration. Also, rather than attempting to time the markets, focus on allotting time in the markets – i.e., stay invested for a longer duration. Happy investing!