There are so many investment avenues. Almost all of these avenues come under the purview of a supervisory body and hence there is slim to none chance of any fraud. Fixed deposits, National Saving Certificates (NSC), Kisan Vikas Patra (KVP) etc. are all good investment avenues but the problem is that they give an extremely low rate of return. You invest your money in any of these instruments and the returns you get are truly heartbreaking. For instance, you get only 5% interest on a fixed deposit of Rs.1 lakh. No doubt the security of investment is guaranteed but the returns will not help you complete any financial goals anytime soon.
Mutual funds, on the other hand, give a high rate of return and the risk category totally depends on you. People often get confused between SIP, mutual fund, and ELSS. But these are all ways to invest in a mutual fund scheme. SIP stands for systematic investment plan and it is perhaps the best way to invest in mutual fund. A SIP builds a habit of saving, reduces the overall risk of investment, benefits the investor through rupee cost averaging, and allows the investor to achieve their financial goals on time. However, if not utilized properly, SIP can be a bane for the investor. Here are a few SIP mistakes which investors make every now and then. These mistakes can seriously hamper your fund’s performance.
- EARLY EXITS: The market cycle consists of 2 phases; bull phase and bear phase. Bull phase is when the market is growing fast and the bear phase can be compared to the recession. When the market hits the bear phase, people have a tendency to exit from the mutual fund thinking that they would have to bear losses. But it is during the bear phase that the fund actually works and gives you returns after 7 – 10 years.
- INCREASE THE AMOUNT OF INVESTMENT: You can start a SIP with an amount as low as Rs.500. It is very important to increase the level of investment because if you keep the amount of investment the same every month, then you will not be able to truly realize the potential of the investment. Hence increase the amount of investment as your income level rises.
- SHORT TERM INVESTMENT: Systematic investment plans are not like your short-term investment instruments like fixed deposits or NSC. A SIP gives you a decent return after 7 – 10 years. If you pull out your investment even after 3 years, you will witness negligible gains.
- INCORRECT COMPARISON WITH BENCHMARKS: People compare the performance of the SIP soon after starting it. During the first 6 – 7 months, it would be really foolish to compare it with benchmarks. The right time to compare the performance of the fund is after 1, 3, and 5 years.
- SELECT THE FUND ACCORDING TO YOUR FINANCIAL GOALS: Selection of an appropriate fund is crucial. The fund should be capable of giving returns which would help you accomplish your financial goals. You will get low and unsatisfactory returns if you invest in the wrong fund.
- SELECTING BETWEEN DIVIDEND AND GROWTH: By choosing dividend, you really limit the end result of the fund. The dividend is suitable for those people who need the support of a side income. If you let your investments grow, the amount at the end of the period will be much more than the sum of dividends you received every month.
- SELECT MULTIPLE FUNDS TO INVEST YOUR MONEY: You put your money in jeopardy by investing in only 1 fund. Ideally, you should put your investment in at least 3 funds. That way you can be sure that if a fund underperforms, the other 2 can make up for it. It is highly unlikely that all the funds will go in the same direction.
SIP is perhaps the best way to invest in a mutual fund. Any of these mistakes can seriously hamper the performance of the fund. So next time you invest through a SIP be sure that you don’t make any of these mistakes.