Making investments and generating profits hinges on decision-making. It starts with grasping the fundamentals of the product or policy and extends to considerations like budget availability and selection. At the same time, the payment methods employed are pivotal components of effective financial planning.
The systematic investment plan (SIP) has garnered attention from investors, particularly young, first-time retail investors aiming to secure their retirement or achieve goals such as homeownership or higher education, or may be just travel.
Here’s a breakdown of how SIP works:
- Regular Investment: You choose a specific amount to invest and a schedule (weekly, monthly, quarterly).
- Rupee Cost Averaging: By consistently investing, you purchase units at different market prices, potentially averaging out the cost per unit over time.
- Compounding: As your investments grow, you earn returns on both the initial investment and the accumulated returns.
Apart from SIPs, another prevalent method is ‘lump sum’ investing. Mutual fund investors often face this decision dilemma when starting an investment plan. Today, we bring to you five common mistakes to avoid when planning your first SIP investment.
When participating in SIPs, it’s essential to steer clear of specific mistakes to ensure the best possible results.
Here are five common pitfalls to steer clear of:
1. Not Having A Clear Financial Goal: What are you saving for? Retirement, child’s education, or a down payment on a house? Knowing your goal will help you choose the right SIP plan and investment horizon.
Harsh Gahlaut, CEO, FinEdge, says, “Unfortunately, most investment advice in the country leads up to the ‘recommendation trap’, where financial advisors make the product their primary focus, instead of customising the plan to the person who is actually making the investment. This is the reason why investors end up chasing returns rather than having a goal-centric unique portfolio-led scientific investment process.”
“Once you have identified your investment purpose, duration, amount needed and done the necessary calculations to meet your financial goals, the next step is to identify the right asset class to invest in based on duration, transparency, liquidity and cost,” Gahlaut adds.
2. Neglecting Research: One of the most significant mistakes investors make is jumping into SIPs without conducting adequate research. Before investing, thoroughly research the mutual funds or investment avenues available, considering factors such as past performance, fund manager expertise, expense ratios, and investment objectives. Be realistic about how much you can invest regularly. Investing too little may not help you achieve your goals while investing too much can strain your finances.
Once you have decided where to invest, the next step is to figure out how much you need to invest, says Gahlaut.
“Do not fall into the trap of investing some arbitrary amount! These ad-hoc investments will lack resilience and not serve any real purpose. It’s extremely important to invest according to a set plan, one that incorporates relevant and clearly defined goals. The best way to calculate how much you need to invest in Mutual Funds would be according to your financial goals,” he adds.
3. Ignoring Risk Tolerance: The stock market goes up and down. Don’t panic and stop your SIP when the market dips. SIP helps you average out the cost of investment over time. Each investor has a unique risk tolerance level based on their financial goals, investment horizon, and personal circumstances. Ignoring your risk tolerance and investing in SIPs with high volatility could lead to panic selling during market downturns, jeopardising long-term returns. It’s essential to choose SIPs aligned with your risk appetite.
4. Timing the Market: Attempting to time the market by starting or stopping SIPs based on short-term market movements can be detrimental. SIPs are designed for long-term wealth creation, and trying to predict market highs and lows often leads to missed opportunities or unnecessary losses. Consistency in investing through SIPs regardless of market conditions is key.
5. Overlooking Diversification & Not Reviewing Investments: Concentrating investments in a single asset class or fund exposes investors to higher risks. Diversifying SIP investments across various asset classes, sectors, and fund categories can help mitigate risks and enhance overall portfolio stability. Neglecting diversification could result in significant losses during market downturns.
Setting up SIPs is not a one-time task, it requires periodic review and adjustments. Failing to review SIP investments regularly could mean missing out on opportunities for portfolio rebalancing or switching to better-performing funds. Regularly monitor the performance of SIPs against your financial goals and make necessary adjustments as needed.
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