Making a Systematic Investment Plan (SIP) is one of the smartest financial moves you can make. This disciplined, regular investing approach allows your money to grow through the power of compounding. But even good plans can go bad if you make some common sip slip-ups. Steer clear of these 5 mistakes so your investment doesn’t drain away.
1. Not Having Goals
Blindly putting money into SIPs without having clear financial goals is a formula for disappointment. Are you investing for retirement, your child’s education, a house? Define what you’re aiming at so you invest properly to hit your target. Goal-less investing leads to investing less than you should or withdrawing prematurely. Big mistake!
2. Choosing the Wrong Investment
With so many potential investments out there, it’s crucial you choose the right one for your SIP. Opting for an overly complex or risky instrument that you don’t fully understand could undermine your SIP. Stick to simple, relatively safe options that align with your risk appetite, time horizon and goals.
3. Inconsistent Contributions
The major advantage of a Systematic Investment Plan (SIP) lies in the power of compounding – earning returns not just on your principal but also on accumulated gains reinvested over the long run. But to harness this, you must invest with discipline. Inconsistent contributions, like paying into your SIP sporadically or taking a break, breaks the compounding cycle. With lower reinvested earnings, your investment won’t grow as quickly. Skipping or stopping temporarily seems harmless, but over decades it hugely reduces gains. Stay consistent with your planned monthly investments to allow your money to grow exponentially through compounding.
4. Not Increasing Contributions
A common mistake when starting a Systematic Investment Plan (SIP) is to not increase contributions over time. Even if you start small, as your income rises, you should incrementally increase the amount you invest through your SIP. This is because of the power of compound interest – earning returns on your reinvested returns. Even a small increase made regularly can snowball into a big difference in earnings over long periods. So remember to review your SIP value yearly and give it a raise by hiking your contributions. Don’t leave possible investment growth on the table. Leverage the compounding effect to your benefit.
5. Panic Withdrawing During Market Drops
Investments in assets such as equities or equity mutual funds maintained in systematic investment plans (SIPs) are inherently volatile. Many investors worry when markets collapse, stopping or withdrawing from SIPs. But these reductions let your fixed payments purchase additional units at a lower cost. When the markets ultimately rebound, you will receive higher profits if you keep making the same investment without stopping. Time in the market is more important than timing it!
Conclusion
The goal of a systematic intermittent payment plan (SIP) investing is to gradually build up your money over time. But if you make the incorrect decisions, your investment’s potential for financial growth might be quickly depleted. Be a knowledgeable 5paisa investor by avoiding these 5 typical SIP blunders to position yourself for future financial success!