If you are looking for a simple way to grow your wealth over time, Systematic Investment Plans (SIPs) could be your answer. SIPs offer a convenient and disciplined approach to investing in the financial market. SIPs entail consistent investments of a predetermined sum into mutual funds or stocks, like sowing a seed and nurturing it to flourish into a sturdy tree. However, as straightforward as SIPs might seem, investors often stumble upon a few common pitfalls. Let's discuss them.
Before starting a SIP, have a clear goal and time horizon for your investment. This will help you to choose the suitable mutual fund scheme that matches your risk profile, return expectations, and investment duration. For example, if your goal is to save for retirement, you may want to invest in an equity-oriented scheme that can generate higher returns over the long term.
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On the other hand, if your goal is to save for your child's education, invest in a balanced or debt-oriented scheme that can provide stability and safety for your capital.
Another common mistake investors make is investing the same amount of money in their SIPs every month without increasing it periodically. This may limit their wealth creation potential and make it difficult to reach their goal. Inflation, rising expenses, and lifestyle changes may erode the value of your money over time and reduce your purchasing power. Therefore, periodically increasing your SIP amount is vital to keep pace with inflation and enhance your savings.
One way to increase your SIP amount periodically is to link it with your income growth. For example, you can increase your SIP amount by 10% yearly as your income increases. This will help you to save more and invest more over time.
Another way to increase your SIP amount periodically is to use a feature called step-up SIP or top-up SIP offered by some mutual fund houses. This feature allows you to increase your SIP amount by a fixed amount or percentage at regular intervals, such as quarterly, half-yearly, or yearly.
Diversification is a crucial investing principle that helps you reduce risk and optimise your returns. It means putting your investments across asset classes, sectors, themes, and fund managers. By diversifying your SIP portfolio, you can benefit from the performance of different mutual fund schemes.
However, many investors invest in only one or a few mutual fund schemes through their SIPs without diversifying their portfolios. This may expose them to higher risk and lower returns if the chosen scheme or its underlying assets perform poorly.
Investing through SIPs does not mean you can set and forget it. You need to regularly review and rebalance your SIP portfolio to ensure it matches your goal, risk profile, and market conditions. Reviewing your SIP portfolio means checking each mutual fund scheme's performance and comparing it with its benchmark and peers. Rebalancing your SIP portfolio means adjusting each mutual fund scheme's allocation according to its performance and changing circumstances.
You should review and rebalance your SIP portfolio at least once a year or whenever there is a significant change in your goal, risk profile, or market conditions. For example, suppose one of the mutual fund schemes in your portfolio has performed exceptionally well and increased its weightage in your portfolio beyond its target allocation. In that case, you may want to book some profits from it and invest in another scheme that has underperformed but has good potential. Another possibility is when one of the mutual fund schemes in your portfolio needs to perform better and decrease its weightage below its target allocation. In that case, you may want to invest more if you believe it can bounce back.
One of the most significant advantages of investing through SIPs is that it helps you benefit from the market's volatility by averaging out the cost of your investments over time. But most investors stop or redeem their SIPs prematurely when they see negative returns or face financial difficulties. This may defeat the purpose of SIPs and hamper their wealth creation.
Remember that SIPs are for long-term investing. You must not stop or redeem them based on short-term market movements or emotional reasons. This will help you to accumulate more units during the bear market and fewer units when the market is high, resulting in a lower average cost and higher returns over time.
SIPs are a smart and simple way to achieve your financial goals. Ensure you can avoid these mistakes and make the most out of your SIP investments. You must also select the ideal mutual fund by looking into multiple ratios.
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