Four SIP Investment Planning Mistakes People Make

With interest rates on traditional savings instruments falling steadily, more and more savers are turning to Mutual Fund SIP’s (Systematic Investment Plans) to accumulate funds for their future goals. This is evidenced by the fact that SIP inflows soared past the 5,000 Crore per month mark in the month of September 2017, as per official data. AMFI’s “Mutual Funds Sahi Hai” campaign has also been instrumental in building awareness about SIP’s and their benefits.

If you, like many others, are planning to go down the SIP route to accumulate wealth for future goals such as your retirement, or your child’s education, here are four common mistakes to avoid.

Selecting Funds Based on Past ‘Point to Point’ Returns

It’s critical to understand that SIP’s work very differently from lump sum investments. Therefore, evaluating and selecting a fund based on its point to point returns would be a mistake. Unlike point to point returns, that accrue only when markets move in an upward direction, SIP’s can provide returns even in flat markets. This is due to a mechanism called “Rupee Cost Averaging” that automatically capitalises in volatility. For instance, 10-year point to point returns for many midcap funds have been below 10 percent per annum, but the SIP returns from the same funds have exceeded 25 percent per annum in some cases. It’s best to consult a professional financial advisor for assistance on fund selection.

Stopping and Starting Continuously

Stopping and starting SIP’s continuously can prove extremely detrimental to your long-term returns. Doing so robs you of the power of compounding, and can potentially set you back by a large sum of money in the end. Therefore, it’s always best to start your SIP with a sum of money that is comfortable for you, and does not end up overstraining your finances. Make sure you don’t let the flexibility of SIP’s work against you by taking them lightly, simply because they do not levy penalties or heavy exit costs. A disciplined approach to your SIP’s will go a long way in ensuring that you create wealth from them in the long term.

Not Stepping Up Annually

Having started their SIP’s, many people become extremely passive and do not stop to re-evaluate the need for stepping them up periodically. This is especially the case for investors who have started online SIP investments without the support of a qualified financial planner. However, it is extremely critical for you to revisit your SIP amount at least once a year, and step it up. The simple act of a disciplined annual step up can make a massive difference to your financial goals. Take, for instance, the case of an individual who starts of planning for their retirement, which is 25 years later, with a sum of Rs. 10,000 per month.  Without an annual step up, the final accumulated amount would be Rs. 1.89 Cr, assuming a 12% per annum return. With an annual step op of 10%, the amount would be Rs. 3.09 Crores!

Being Too Conservative

Another common mistake people make is letting their risk profiles dictate their choice of SIP Investment Plan. Alternatively, SIP investors should select funds based on their time horizon to the goal in question. For instance, saving in debt mutual funds for one’s child education goal that is 15 years later, is not a very sensible move. The difference between 8% and 12% per annum, over longer timeframes, can work out to a significant number. Similarly, the money being saved for a car whose down payment needs to be made within a year should not flow into aggressive SIP investment plans. For best results, make sure you let your time horizon dictate your choice of SIP investment plan.