Investors new to the investing world have plethora of questions related to investing. What is the best way to invest in mutual funds? What is SIP? What is lumpsum mode of investment? What are the benefits of investing through SIP mode of investment? Often new investors confuse SIP with mutual funds, assuming that these investment products are interchangeable. However, they cannot be more wrong. SIP or systematic investment plan isn’t any investment product. Rather, an investment tool that allows investors to invest in mutual funds. Hence, one does not invest in SIP, rather invest in mutual funds through SIP. Now, that we have cleared the most common yet most widely misconstrued concept about SIP investment, let’s understand if you should go forward with SIP route of investment.

What is SIP?

SIP allows individuals to allot a predetermined sum of money at regular intervals in their desired mutual fund schemes. The predetermined amount of money gets debited from the bank account of the investor on the specified date and is used to purchase mutual fund units at the prevailing NAV of mutual fund or net asset value of the fund. Let’s understand the working of SIP with the help of an example. Maria wishes to buy a new phone which is estimated to cost Rs 60,000. However, she does not have the entire amount handy with her currently and decides to invest in mutual funds through SIP mode of investment. She invests Rs 5,000 per month in her desired mutual fund scheme for a year. By the end of the year, she would not have only invested the entire amount of Rs 60,000 but also earned potential yields on the schemes she buys each month.

What are the benefits of SIP?

There are several benefits of SIP mode of investment. Here are a few benefits of SIP mutual fund:

  1. SIP mode of investment has a very low minimum investment amount of just Rs 100 per month. This makes them quite affordable for individuals belonging to different economic backgrounds.
  2. SIP investments are quite flexible in nature. An investor has the liberty to change the frequency of their investments, the SIP investment amount, tenure of the investment, the mutual fund scheme they wish to invest in, etc. before and even during an investor’s SIP investment journey.
  3. SIP investments are automated in nature. What this means is that a specified amount would automatically get deducted from an investor’s bank account at specified intervals for a given period. This helps to instill financial discipline among investors which is required when investing in the markets.
  4. SIP investments also allow investors to enjoy the benefits of the power of compounding. Compounding allows investors to earn substantial yields on their investments.
  5. SIP investments also benefit investors through a concept known as rupee cost averaging that averages out the cost of mutual fund units purchased over a period.
  6. SIP also eliminates the need to time the markets. Rather, an investor must focus on time in the market.

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Systematic Investment Plan, or popularly termed as SIP are an investment tool that help investors to their small, insignificant investment amounts into a substantial amount over time. These investment tools are widely used by investors to achieve higher returns on their mutual fund investments through systematic and disciplined approach of investing. However, there are a few common SIP mutual fund blunders that one should look out for. This article aims to highlight the same.

Common SIP mutual fund mistakes

Following are a few common SIP mutual fund blunders that prevent investors from making big money:

  1. Making hasty and impulsive decisions

Investors often find themselves in a crunch when they get carried away by the benefits of investing in mutual funds via SIP and choose to go big. This results in them allocating a significant sum of money towards SIP mutual funds without examining their present situation and competences. Unable to match these gigantic numbers in the future, they often end up stopping their SIP investments, which is frowned upon by financial experts and advisors.

  1. Bear vs bull market cycles
    SIP mutual fund investors often make the mistake of pausing their SIP investments when the markets are in the bearish phase. This isn’t encouraged by experts as they miss the opportunity of obtaining more NAVs (net asset value) owing to a concept known as rupee cost averaging. In fact, it is advised that one should use the bear market cycles as an opportunity to top-up with a lumpsum amount. One needs to understand that during bearish phase, the investment cost is low, which has a great potential for higher returns in the future.

  1. No habit of creating a cushion
    Several investors make the blunder of going all in and investing their entire savings without considering their future financial condition in the heat of the moment. This might result in an unappreciated and a sticky situation of debt trap. Hence, experts advise investors to create a financial plan and evaluate their financial situation before deciding to invest in mutual funds.
  2. No connection with financial goals
    Numerous research and studies are a testament to the fact that an SIP investment started after careful analysis of one’s financial goals and situation are bound to perform better than an SIP investment started on an ad-hoc basis. This is because the former is mostly started after due-diligence and proper back calculation using an SIP calculator to reach a specific target. Mutual funds SIP calculators are an amazing investment tool to help you determine the right SIP investment amount needed to reach a particular corpus. All you have to do is enter the investment horizon, expected rate of returns on your mutual fund investments and you’ll get the magical number within seconds. It is a good idea to factor these numbers against the appropriate rate of inflation, so as to get a real picture about the returns on your investments.

Now that you have got a better idea about the common SIP mutual fund blunders committed by most investors, hope you’ll make a better and informed decision. The next time you begin to invest in mutual funds via SIP mode of investment, do not forget about these common mistakes. Happy investing!

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