The ideal way to commit an SIP amount is to evaluate your current financial status, risk profile and the goal
Systematic Investment Plan (SIP) is a facility offered by mutual funds where in investors can invest in MF schemes on a fortnightly, monthly, quarterly or annual basis. SIP not only avoids timing the market but facilitates wealth creation journey in a disciplined manner in the long run. But many at times investors end up making mistakes that could lead them to losses or miscalculating the SIP amount or the target amount. Here are five key SIP mistakes investors should avoid:
1. Know yourself to know your SIP amount better
Quite often, many investors choose to commit a huge amount for SIP without realising their current financial status, this could lead the investor either to drop out from the commitment in midway or lose interest in investing further or in future. Similarly, committing a smaller SIP amount could be insufficient to reach the target amount. The ideal way to commit an SIP amount is to evaluate your current financial status, risk profile and the goal for which you are investing so that your SIP does not pose a financial burden.
2. If you want joy in the long term, do not think short term
A very common SIP mistake by investors is they invest for a shorter time. Quite often, investors do not understand that the value of their SIP does not rely solely on the amount that is invested, but also on the time period -- the longer you stay invested, higher will be the value of your investments. For instance, if you choose to invest Rs 5,000 every month in a SIP for five years, the total value invested would be Rs 3 lakh; while the total value created from those investments would be Rs 4.12 lakh in five years at an assumed rate of 12%. By investing in SIP, you have created over Rs 1.12 lakh in a span of five years. And if you had remain invested for another 10 years, the total value invested would be Rs 9 lakh; while the total value created in 15 years would be Rs. 25.23 lakh at 12% per annum. The ideal way to invest in a SIP is by staying invested for a longer period of time.
3. 'Boost' could be the secret of your wealth creation journey
As you grow professionally, your salary also grows simultaneously so will be your financial goals or aspirations. Why not your SIP commitment? For instance, your initial goal was to go on a domestic holiday costing you Rs 50,000. Hence, you started with Rs 1,000 SIP a month for two years. However, after two years you decided to to go on an international holiday destination. But Rs 1,000 a month won't help you realise the dream. Hence it's wise to fuel your existing SIP as and when there is a financially high period such as annual appraisal or bonus.
4. For needs that are 'small', now that's a 'big' fallacy
A common misconception around SIP is that it's meant to be invested in small amounts as it's often communicated as a low-ticket size investment facility. Your SIP commitment should be determined by your current financial status and the goal for which you are starting the SIP. There is no upper limit to the amount you wish to invest in SIP. For instance, if you are aiming to buy a house in next 10 years; then you could allot Rs 2 lakh for investing in SIP that would grow to Rs 4.65 crore at an assumed rate of 12%.
5. 'Growth' is a good change
An investor before investing is presented with two options, either growth or dividend. The dividend is a withdrawal from the corpus, and so the effect of compounding is reduced and it subsequently affects the growth of your targeted corpus while if no dividends are paid or declared, and thus the corpus would grow and benefit from compounding. The better way of investing in SIP is by opting for growth option, wherein there is a minimal effect on your corpus. Despite opting for a dividend option initially, you can switch to growth option or go for dividend reinvestment option, which can give you the same benefits as the growth option or vice versa.
SYSTEMATIC MONEY-MAKING
- The ideal way to commit an SIP amount is to evaluate your current financial status, risk profile and the goal
- The investment value is created by the time period of investment which benefits from the power of compounding
- It's wise to fuel your existing SIP as and when there is a financially high period such as annual appraisal or bonus to meet your dynamic goals
- Despite opting for a dividend option initially, you can switch to growth option or go for dividend reinvestment option
The writer is CEO, Motilal Oswal AMC
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