SIP is one of the easiest and effective ways to build long term wealth. The concept is simple, just invest regularly, check periodically and stay aligned to your goals. Despite its simplicity many investors make basic yet avoidable mistakes.
Let’s surf through them and make your SIP journey benefitting.
1. Skipping SIP
SIP is like ‘gyming’ – you skip days you miss gains. The concept of SIP is based on consistency. If you miss the hold of the foundation, your building would definitely fall.
Let’s understand how this works:
Assuming, you’re investing Rs 10,000 through monthly SIPs from JAN 2020 to JUNE 2035; 15 years 6 months i.e. 186 months. The cumulative amount sums upto Rs 18.6 lakhs, with an average annual return @ 11.9%. The ROI comes to Rs 53.6 lakhs.
But if you had missed one month a year that means 15 SIPs , your ROI would’ve fallen to 49.4 lakhs
That means, missing Rs 150,000 would reduce your ROI by Rs 4.2 lakhs that’s more than double the amount of Rs 150,000.
Skipping once a year costs you much more than you saved. Missing a few steps may not feel like much but over time it sums up. So stay consistent and stay invested.
2. SIP Not increasing SIP Investment Amount
As breadwinners, we strive to grow professionally, get promotions, increments, appraisals, bonuses and greater recognition. We usually tend to upgrade our lifestyle like homes, phones, cars, vacations with increasing income but very few of us think of upgrading our SIP investment.
Let’s understand how this works:
Imagine you’re earning substantially more every year and your lifestyle improves but your future wealth doesn’t keep up, it’s because your investments are stuck in the same gear. To align your future and financial goals with your career progression your SIP must grow with you. It’s based on the simple concept of Income, Consumption and Savings/ Investments.
Illustration:
You’re investing Rs 5000 every month for 20 years i.e., cumulative investment of Rs 12 lakh and assuming the annual rate of return to be 12% your cumulative ROI after 20 years sums up to Rs 49.96 lakhs.
What if you had increased your investment by 10% every year?
The total you invest over 20 years is Rs 23.4 lakhs and the ROI comes to Rs 1.15 crore.
That means if you increase your SIP by Rs 500 every year (10% of Rs 5000), your wealth could grow from Rs 49.96 lakhs to Rs 1.15 crore.
And that’s substantially greater wealth than before, by adjusting your SIP once a year.
So, when your income goes up, increase your SIP even by a small amount. Don’t let your SIP stay stagnant while your career grows.
3. Opting for IDCW Plans rather than growth plans.
When investing SIP in mutual funds, even a small decision can make a big impact on your wealth. One of which is choosing between growth plans and IDCW plans.
Choosing the IDCW plan seems better on the surface with regular dividend payouts. But what happens is that your returns are paid out to you periodically and don’t get reinvested.
Now what’s the problem with this? That means;
- Compounding won’t work for you anymore
- Your money doesn’t stay long enough to grow significantly and,
- The payouts may also be taxed.
In a Growth plan, your money stays invested over the years, and your funds build momentum to grow significantly helping your wealth grow faster.
So, if you are planning long term growth the smarter choice would be the growth plan. It’s as if picking a fruit every week rather than letting the tree grow and bear fruit lifelong.
4. Opting Not having SIP’s for specific goal
Investing early is great but a newbie mistake people do is not setting a purpose. They begin one or two SIPs with no goal behind it.
It’s the same as getting on a train without knowing where it is headed.
Everyone has different responsibilities and dreams, some would have a short term purpose of funding a vacation or any short term upgrade whilst some would plan long term benefits for child’s higher education, marriage, foreign vacation, buying a property, post retirement.
It’s important for your SIPs to align with your goals so that it makes easy for you to:
- Deciding the right amount to invest
- Choosing the right fund
- Knowing when to stop or redeem
It’s important to have a roadmap and not just invest blindly. Moreover, having a goal makes us more committed, we are motivated and more likely not to stop midway through.
4. Not monitring SIP’s periodically
Starting SIPs is not something that you can just set and forget hoping for significant growth of funds. To stay aligned with your goals, you need to keep an eye on your SIPs ideally reviewing once a year.
It’s important to check the performance of all mutual fund schemes because some might consistently deliver while others might start lagging behind.
If a fund underperformed for 18-24 months compared to its benchmarks, it might be time to consider the scheme switch. Another reason it’s important is asset allocation drift.
Assuming that your investment split is 60% in equity and 40% in fixed income options. With equities performing really well, the balance could shift to 75% equity and only 25% in fixed income.
Given the risk exposure is now substantially higher, you balance your portfolio back and keeping the risks in check by either;
- Booking some profits from equity and moving them into fixed income investments, or;
- Adjusting the monthly SIPs by reducing equity and increasing fixed income contributions.
So, monitoring your SIPs helps with:
- Staying aligned with goals
- Keeping away with underperforming funds
- Maintaining healthy asset allocation
- Protecting the investments from going off track
Conclusion
If you truly want to make most of your mutual funds SIPs, these habits can make you go a long way. These small steps on their own build a strong foundation for long term wealth creation together. So, invest wisely and let your money grow with purpose and discipline.
