Systematic Investment Plans (SIP) are a great way to invest for retail investors. It lets you automatically buy more units when the equity market is down and lesser units when it’s up. Moreover, by investing regularly, you keep away from the headaches of trying to time the market.
However, some investors nullify the benefits of an SIP, by making the wrong moves.
1. Remaining tight-fisted
Over a 10-year period, top large-cap and midcap equity funds have given annualized returns of roughly 12% and 16% respectively. Going ahead, investors need to temper their return expectations on the back of a low inflationary environment.
Moreover, the big question is whether one has invested enough? An SIP that results in a small corpus is useless if it doesn’t help you achieve your financial goal.
So do your math. Have a financial target in mind – and work backwards to arrive at the required monthly investment. Equities can be assumed to give anywhere between 11%-12% annually over the long-term.
2. Timing the Market
Investors often stop their SIPs temporarily, when equity market starts correcting. This is not a good idea. Pausing SIPs midway could prove counterproductive as there is a likelihood of the investor missing out on a forthcoming rally or an opportunity to own units at a lower cost, when equity market corrects.
One of the biggest mistakes that investors make is to invest all their savings into a single scheme. While convenient, this could be disastrous.
One of my neighbours, told me that SIPs are not working. I asked him, why? He said “I invested into an equity fund that had a top rating five years back. Now, equity markets have rallied sharply, but my portfolio doesn’t reflect such buoyancy. I am redeeming all the units.”
An SIP way of investing is always beneficial. However, for it to work, investors not only have to stay invested for the long-term but also need to diversify and review fund returns year-after-year.
4. Wrong Choices
SIPs allow for your bank account to be automatically debited on a given date. So, it could be 1, 5,10,15,20 or 28 of every month. Many a time, investors randomly pick the SIP dates.
Ideally, one should pick a date which is a few days after the usual date of salary credit. So, if your salary is expected to be credited on 5th of every month, 10th might be a good date to choose. Choosing somewhere at the end of the month might have the possibility of your bank account having an insufficient balance. Allowing for a few days buffer effectively takes care of those weekends and unexpected ‘delays’ from hard-working accountants.
5. No Cushioning
Lastly, some investors over commit their SIP investments. They don’t provide for an unexpected job loss or a medical expenditure that can temporarily throw their finances off-gear. While in such situations, your emergency funds will come in handy; ensure you always stay flexible.
To sum up, ensure you are investing enough into your SIP while keeping an eye on the long term. Diversify your investments and take the ups and downs of the market in your stride. These smart strategies will definitely do their part to move you closer to your financial goals.
You may also like to read about the Loss Making SIPs