SIPs or Systematic Investment Plans are good investment options, characterized by discipline and patience. Investors can deploy investments at intervals in order to build up a future corpus for meeting diverse objectives. SIPs lower risks, since they enable smaller investment amounts every month. They also spread out and diversify risks in the portfolio, while having sufficient potential for earning stellar returns in the long haul. The power of compounding helps greatly in this scenario.
There are many investment options available, including Escort mutual funds and many others. Yet, there are some mistakes that you would do well to avoid. Here’s taking a closer look at them.
Mistakes that you should avoid
Here are the errors that can cost you, while investing in SIPs:
Not checking past performance of the fund
Many people make the mistake of buying mutual funds with lower NAVs or net asset values. They think that these funds are affordable in the current scenario, and will give them higher future returns. However, before taking any such decision, it is imperative to assess the performance of the fund over the last few years. The NAV may sometimes come down for temporary market reasons, without influencing the future scope of the fund. However, it is always better to do some homework in this regard.
Bear market errors to avoid
Many people top up SIP payments in bearish markets. This is as erroneous as skipping payments in such market cycles as well. Experts feel that you should understand what actually happens in bear markets. The NAVs (net asset values) of mutual funds come down in these cycles. This gives you the freedom to purchase more fund units as compared to bull markets. When the market recovers and the NAV rises, you will get higher returns on your investment, since you now have more units. Instead of skipping SIP payments or stopping your SIPs in bear markets, you should stay invested for the long haul. Get extra mutual fund units at a more affordable rate. Continue the investment at a lower cost without topping up your SIP payments as well. Do not take further risks by investing a higher amount. Get more units at the same amount, and scale up the possibilities of future returns.
Going for dividend schemes
Most people turn to dividend schemes, instead of opting for growth-oriented mutual fund plans. Dividend plans are only suitable for those looking for income on a regular basis. However, it is never the best option, since it lowers the net asset values of your mutual fund units, while generating comparatively lower future returns. For instance, if your mutual fund NAV is Rs. 500 and you get a dividend of Rs. 100, then the net NAV will come down to Rs. 400. The dividend option also means that this income will be taxed. If you take the growth option instead, the profits will be reinvested into your mutual fund. This will compound your money and give you higher returns. You will only have to pay either short-term/long-term capital gains taxes, depending on the time period for which you hold onto your fund. There is no dividend tax payable in this case as well.
Investing with a short-term outlook
SIPs are not get-rich-quick schemes. Investors often make the biggest mistake of choosing SIPs for shorter durations. These investments always generate good returns over a longer period of time, while giving higher tax benefits as well. The LTCG is lower in comparison to the STCG. It is also taxed only for returns surpassing Rs. 1 lakh. The power of compounding also comes down in a shorter duration. The overall returns are always lower in the short-term.
Not scaling up SIP amounts gradually
Many investors also make the mistake of not scaling up their SIP investment amounts gradually. Suppose you put in Rs. 5,000 in 2020, which is around 5% of your net salary (Rs. 1 lakh).
Investing the same amount ten years later will not be a sensible decision. You should keep increasing your SIP amount with increases in your income/salary, taking inflation into account. Hence, if your salary increases to Rs. 2 lakh in a period of ten years, then you should invest at least 5%, which is Rs. 10,000 every month. This will keep you at par with inflation, since the value of Rs. 5,000 ten years earlier will differ from the current value. Unless you keep scaling up your SIP investment, the actual return (accounting for inflation) on your investment will be on the lower side.
Conclusion
These are some mistakes that you should avoid while investing in SIPs. Take a calm and collected approach towards your investment. Do your homework on available mutual funds before investing. Patience, discipline, and perseverance collectively make up the best recipe for a successful investment journey ahead.