What are the biggest SIP Investment Mistakes To Avoid?

Systematic Investment Plans (SIPs) are a simple and practical approach to generating long-term wealth, but they only work if you invest frequently and are disciplined. Retail investors are increasingly accepting Systematic Investment Plans (SIPs) to accomplish critical financial goals by investing frequently and systematically. SIP allows investors to profit from the rupee cost averaging approach and compounding power.

On the other hand, a lack of product expertise might lead many SIP investors, particularly newcomers, to make investment blunders. Here are five such common mistakes that can jeopardise SIP investors’ wealth-building goals:

Setting Unrealistic Goals

Setting an ambitious objective that cannot be realised within a reasonable time frame is a common mistake made by most investors. You might prefer to retire early, for example. However, various aspects to consider, including determining your retirement age, target amount, and post-retirement activities. Setting a realistic and not-too-ambitious objective for your SIP might assist you in meeting the aim according to your income levels.

Opting for dividend option

Many investors prefer the dividend plan to the growth plan because they view mutual fund distributions as a surprise income. The dividends are paid either by the fund or their own AUM, which such investors are ignorant of. As a result, the value of the dividend paid out over the dividend record date is subtracted from the NAV of the dividend-declaring mutual fund.

Additionally, the dividend amount is determined using the fund’s face value rather than NAVs. Consider the case of a fund with a NAV of Rs 100 that declares a 30% dividend. The fund’s investors will get a compensation of Rs 3, or 30% of the fund’s face value, which is Rs 10. After the dividend record date, the fund’s NAV will drop to Rs 97. Furthermore, choosing the dividend has become less tax-efficient, as mutual dividend receipts are taxable according to the investor’s tax bracket.

Opting for a short tenure

People invest in SIPs because they want to make more money in less time. However, funding for a short period of 1-2 years exposes you to greater market volatility.

The market fluctuates throughout the year, and having a shorter-term reduces your chances of cost averaging. As a result, lesser returns in a shorter time frame are more likely. This is contingent on the market experiencing a bull run.

Not Monitoring SIPs

SIP investment is merely the first step. It would help if you kept an eye on it. Check if the SIP is on track with your long-term objectives. Monitor your SIP to see if the returns and risks align with your expectations. Also, keep an eye on the SIP for frequent management changes, policy changes, and regulatory violations.

Stopping SIPs during bear market

Many investors stop their SIPs due to sharp market corrections or adverse market scenarios, fearing more losses. However, by purchasing more shares at lower NAVs during market downturns and dips, one of the key benefits of utilising SIP to invest in equities mutual funds, rupee cost averaging, is negated.

Continuing with SIPs during steep market declines or adverse market conditions would minimise your investment cost and achieve higher long-term returns because excellent equities are available at favourable prices.

Stopping in between

Market conditions make investors nervous. Investors often lose faith and terminate their SIP when the market goes down. They have decided to halt their investments due to the risks of increased market volatility. People can become anxious when they see red marks over their portfolio worth. That is, however, in which they are going wrong.

Final Thoughts

With a focus on long-term growth, many people would be mistaken to choose the dividend option to receive income and partial disbursements regularly. This is unfortunate because it contradicts the primary benefit of SIP investments, and keep in mind that mutual fund companies and their plans do not promise monthly dividends. As a result, the compounding growth of your original investment (wealth-building process) does not achieve its full potential.

Alternatively, your initial contribution is reinvested numerous times and compounded to increase your wealth if you choose the growth option. As a result, select the growth option to obtain compounded wealth and, eventually, assist you in achieving your objectives.