Mutual Fund Systematic Investment Plan ( SIP ) is way to create wealth in long term

Over the years, the Systematic Investment Plan (SIP) has emerged as a popular mechanism for investors in equity funds. This is not surprising, since a disciplined approach allows investors to limit their downside and reduce the variance on their returns. Also, by investing a fixed amount at a set interval, regardless of market conditions, investors can remove emotions from the decision-making process.

True, Indian investors have had mixed experiences with SIPs, especially in equity and equity-oriented funds. That many investors stop their SIPs every time the stock market spirals downwards is testimony to their indiscretion in following an approach that propagates disciplined investing.

Here are a few mistakes that investors make and a synopsis of how these can be avoided:

Investing aggressively through SIP: Many investors make the mistake of starting an SIP with an amount that they find tough to continue aftera while. So, start conservatively and gradually increase the amount to ensure continuity.

Investing for a year at a time: It is common to see investors committing to invest through SIPs only for a year or so. The rationale for this approach is to analyse the performance after a year and then take a long-term call. This is an illogical way of assessing the performance of an asset class like equity and the effectiveness of a powerful mechanism like SIP. The right way would be to invest for a minimum period of five to seven years. The longer one follows this process, the more one benefits from 'averaging' and the 'power of compounding'.

Thinking I cant lose money if I invest through SIP: 'Rupee Cost Averaging' doesn't mean one can't lose money. While SIPs help get the benefits of 'averaging', risks associated with the asset class still remain. However, the impact gets minimised significantly if one continues the process for longer.

Stopping SIP in a falling market: The objective of investing through SIPs is to turn market volatility to ones advantages. But many investors stop it when markets fall. The key is to continue the process for a committed period of time, irrespective of the market mood.

Opting for dividend option while investing through SIP: The power of compounding works best when one invests for the long-term and allow the gains to remain invested. Taking out money at regular intervals, would defeat the purpose. So, go for the "growth" option.

Investing in aggressive funds at the start: Many investors make the mistake of investing heavily in aggressive funds, such as sector, thematic and mid- or small-cap funds in the beginning, thinking since these funds are more volatile than diversified funds, they will benefit more from 'averaging'. Investors should remember that to achieve long-term goals, one needs to invest in funds that are diversified and have the potential to perform consistently.

 

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