The Mistakes we should avoid while doing SIP in Mutual Funds

We all have heard a lot about benefits of systematic investments and SIP is the favourite tool for small investors to create wealth by making small- small investments. Regular investments is most effective tool for investors to create wealth in a disciplined and systematic way. In SIPs a small investors who has as small as Rs. 500/- also has the same opportunity to earns as  an individual who has got thousands or lakhs of rupees.  This is due to the power of compounding where every interest on interest is added to provide maximum returns. While almost all of us are aware of the power of Systematic Investment Plans or SIPs, we some times make a few fundamental errors when it comes to the actual investments and maintaining it. Here we are going to point out a few so that nothing comes between us in the process of creating wealth.

1. Plan your regular investment by analysing at future cash flows

The most important feature of SIP  that distinguishes it from other means of investment is the small amounts that we can invest. Hence, if we commit a huge amount at that start and then fail to continue it for few months because of lack of savings, high expenditure or some financial problem then we have actually lost the avenue for investment for those months. Although we can still invest the instalments missed for those months later on. However, out of 12 months if we manage to invest only for 10 or 8 months, our investment would not generate the return we would have expected?

So it is better that instead of being overly ambitious or optimistic regarding the monthly systematic investing, we should analyse of future cash flows first and then decide a realistic amount which could be manageable. It is important that we are comfortable with our finances after the investment. Our investments should not become a burden. If we cannot invest a stipulated sum on a monthly but on a quarterly basis we should opt for that option as well. Picking an amount that is too high or too low can put an unnecessary pressure and affect the performance of our investments.

2. SIP is not just for Small Investors

There is a common myth associated with Systematic Investment Plans that investors who cannot invest through lump sum should invest through SIPs. Or it is generally for the investors who have small amounts. This could not have been far from the truth reality.  SIP can be made for any amount and there are investors who invests lakhs of rupees on regular basis. It is like Instead of Rs. 5000 a month, if you we spare र 500,000 a month; we can always still invest in SIPs. The fundamental of Systematic Investment Plans or SIPs, i.e. time value of money, rupee cost averaging and compounding do not change irrespective of the amount invested. So if we can manage to invest large sums in lump sum or regularly per month, we can still invest in SIPs and get the same benefits.

3. SIP’s are for a year or so

As mentioned above SIP’s run on the basic principal of time value of money, rupee cost averaging and compounding, so if someone is investing in SIPs for a year or so he will actually won’t get any significant benefits and the purpose of SIPs gets defeated. The value of investments is not created through the amount we invest but it is created by the time period of that investment. The longer we stay invested, higher will be the value of our investment.

Value of Systematic Investment Planning over a period of time
Monthly Investment (Rs.)	Investment Period (Years)	Expected Annual Rate of Return	Invested Amount (Rs. Lakhs)	Maturity Amount (Rs. Lakhs)	Absolute gain (Rs. Lakhs)
5,000	2	14%	1.2	1.39	0.19
5,000	5	14%	3.0	4.36	1.36
5,000	7	14%	4.2	7.15	2.95
5,000	10	14%	6.0	13.10	7.10
5,000	15	14%	9.0	30.64	21.64
5,000	20	14%	12.0	65.82	53.82
5,000	25	14%	15.0	136.36	121.36
5,000	30	14%	18.0	277.85	259.85

As we can see form the example above  , if we continue the investments for a number of years, has been shown. In th first two years the corpus of Rs. 1.20 lakhs increase by only Rs. 19000 which is just 15.8% of the investment value.  However if we continue investing the same amount month after month and stay invested for 25 – 30 years the corpus grows to a phenomenal Rs. 1.36 crs to Rs. 2.77 crs which is 9 to 15 times of the total investment amount. As can be seen from the table above the investment value is created by the time period of investment and thus benefits from the power of compounding. Hence, if we are thinking of redeeming after a short period of time we would be losing on potential wealth creation and may also result in losses.

4. As the market falls we also fell of SIPs

We have heard a lot about it that someone says that I stopped my SIP as the market is falling so no point to continue with it. We try to time the markets and invest in rising markets and redeem in falling markets. In fact it should be the opposite, where the investors should redeem or stay invested in rising markets and invest in falling markets. Investors investing through SIP redeem SIPs when markets fall and this is a big mistake. They should look at this as an opportunity to invest more because if they invest in a lower market they get higher number of units as the NAV is low and benefit in terms of rupee cost averaging. Common investors do not have the expertise to filter noise from information. Short term market fluctuations are created by noise in the market and they have no significant impact on investments. Hence, if we hurriedly redeem our investments without analysing the situation we may actually be losing out on potential wealth creation.

Investors mistakenly think that short term fluctuations can erode their investments. That cannot happen. In fact, if we have planned to stay invested for a long period of time, these fluctuations should hold no value at all. The longer we stay invested, the lesser will be the impact of short term fluctuations.

5. Regular Income makes me feel happy

As an investor when we are choosing the fund to invest, We have two options: Dividend or Growth option. Dividend is basically a withdrawal from the corpus and thus if we are opting for that, the compounding effect is reduced and it hinders the growth of our targeted corpus. In growth option, no dividends are paid or declared and thus the corpus continues to grow and benefit.

Compounding, often called the eighth wonder of the world, works by creating a chain of interest on the interest calculated to the last divisible penny. Hence, the returns through compound interest are way higher than the return that is calculated through simple interest. In case you have already opted for the dividend option, we can change it to growth option or for dividend reinvestment option later on also. Dividend reinvestment option also gives same benefits of growth however it increases the number of units.

6. Keeping the SIPs same even if income is growing

As the time grows our income and expenses also keep on moving up. We may also go through financially lean periods and financial highs. During the period of financial high, we should accumulate as much as we can. However, if we do not have any urgent financial requirement or anything particular to do with that sum, the chances are we may spend it. Instead of allowing this to happen, we should add this to our existing SIP fund. Now few mutual fund companys offer options wherein we can automatically increase the SIP amount over a specific period. We can also add lump sums to the same fund in the same folio or account even if we are investing a lump sum amount. Adding a lump sum once in a while boosts the investments. After all, the SIP amount and a lump sum are bound to generate more returns than just monthly investment. If we have lump sum, we should always add it to your ongoing investments.

7. Redeeming in between then for

We some time tend to redeem parts of their SIP investments whenever there is requirement for some amount during some urgent need etc. And later on decide to either adding back the amount or not adding it at all. While adding later puts back the corpus to where it was supposed, however returns may not be similarly. However, If you have redeemed a part of the corpus only to add it back six months later, you have lost the return that the part redeemed corpus could have generated in those six months. We should always remember that It is not the corpus or the amount that determines the returns; but the duration of investment and the discipline that makes the difference. More importantly, the momentum of generating the targeted corpus for the long term gets disturbed. We should never redeem your SIP investments partly or fully during the SIP period. Systematic Investment Plan is a long term investment idea for wealth creation and therefore should not be used like a bank account. For any emergency or unforeseen events we should have sufficient balance in your savings bank account or liquid funds.

Conclusion

We can learn form mistakes but it would be much better if we learn from others mistakes or the from the experience from the experts It is often said, learn from your mistakes. We are not required to make the above mistakes to learn from them. As now we already know what the common mistakes are, we need to ensure that we don’t repeat them with our investments. Once we can follow these principals, there is nothing that stands in our way of wealth creation.