If you are a vivid “Personal Finance” related article reader, like me, then surely you would have read at least one article wherein it says that there are lots of cash inflow to Mutual Fund industry via SIP route while market is moving upwards, like we saw till Diwali time, and if you observed closely such news disappears when market stumbles, like it did post Diwali. Because seldom such news appears in down trends. The market is going to be volatile by its nature. Based on my discussion with few of my friends and few online articles like this I was able to find few mistakes which we make with our SIP investments.
Below are few mistakes we make, I myself included, with our SIP investments.
- Low SIP amount
A lot of people are skeptical about returns from the Equity market. After much discussion with someone who is a big believer in Personal Finance these people start SIP investments with a minimum possible amount of 500 rupees (in most cases). For me, getting these people to Equity market is like half a battle won, but remaining half has to be fought by these people themselves. Starting small does make sense if you are willing to learn how things work in SIP, but such a small amount SIP is not going to help you gather big corpus amount you may need for your big goals. So it’s essential to balance SIP amount to something which can be achieved month on month.
- High SIP amount
There are few people who go overboard with SIP investment and go beyond their limits to start SIP with high amounts, may be because of much of noise from market or peer pressure. But reality struck these people in few SIP investments, they could not afford to have such a high SIP investment and end up skipping few SIP payments or in worst case stops them all together. It is essential to have a right amount of SIP which you can afford month after month consistently without sacrificing regular life expenses.
- Choosing Dividend option instead of Growth
Before I jump into this point, it’s essential to understand what is Compounding Interest. Take a pause and watch video from Investopedia to learn how compounding works and please come back.
“Compound interest is the eighth wonder of the world. He who understands it earns it … he who doesn’t … pays it.” by Albert Einstein
While I have you back on this article, let me explain same in short. If we keep investing earned interest then invested interest gets us more interest which over time becomes a big number, but if we withdraw interest earned, by choosing Dividend option, without a need of money than we loose eighth wonder working on our side. So unless you need constant money from investment, retired people may need it, always choose Growth option instead of Dividend so that compounding works on our side, instead of against us.
- Not to increase SIP in line with salary increments
A lot of us gets annual increments, and a few gets regular bonuses too. But the fact is our expenses increase linearly, instead of once in a year like an increment does hence on time of increments / bonus we have a clear gap of available surplus to invest and expenses. Because of this gap between expenses and increased salary we end up having additional money in saving account, which gets spent on impulse buys unless we plan to invest it. It’s always advisable to increase SIP investible amount along with annual salary increment to give a boost to our saving habits and avoid impulse buys.
- Sell now to buy later
A friend of mine who earns decent, if not bad, salary but he always tries to convince me that when the market is on a downward trend we should sell equity and buy again when it’s on a bottom. He usually comes with either of two explanations. 1) Urgent need of money, 2) Need to book losses to avoid taxes on earlier profits. Now, theoretically and practically both of the explanation makes sense. But there are different ways to cover these explanations. For the urgent need of money it’s advisable to keep few months expenses worth money aside as “Emergency Fund”, either in a savings account or in some form of a debt fund, but selling investment may come with a risk of buying at high later on. For the second scenario, theoretically it makes sense to sell now and buy again on deeps but what’s guarantee that it’s not a deep when you are selling, you again have a risk of buying at high later.
A famous quote from Warren Buffet is my thumb rule when I make a transaction. I do have an exit strategy in place in most time, as I do not want to become Abhimanyu of our times, but this quote helps me not to panic. “Our favorite holding period is forever.”
I strongly believe if this friend of mine builds “Emergency Fund” for himself, he may come out of such “Sell now and Buy later” strategy if he is convinced that stock is worth more than what he has already bought it on.
- Stop SIP in bearish markets
A lot of people stops their SIP investments during bearish market because there is a lot of noise on TV / Internet about loss and probably their own portfolio is also bleeding red. But if you are a long-term investor then such a downward trend is fantastic opportunity to buy more as most of the equity is available on discount. All such people look out for discount coupons on PayTM / FreeCharge for all kinds of transactions with cheers, but when the universe gives them equity on discount then instead of grabbing it with open hands I don’t know why they abandon the idea of having equity altogether. People commit mistakes of entering the market on high and leaving at low due to panic and blame the market as a gamble.
“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” by Warren Buffett
These were a few mistakes I have observed with SIP investments. I have made few of them myself, but I consider that as a price paid to learn these lessons. I am sure this is not the complete list and there are much more, but it will certainly help if we learn from other’s mistakes instead of paying price to learn all mistakes oneself. Life is too short to make all such mistakes.
*Image Credit : PinksWorth
Also published on Medium.