4 mins read . 08 Dec 2022
One of the best ways to systematically create wealth in the long run is through an equity SIP. A systematic investment plan (SIP), is a methodical way of investing in a mutual fund so that money works really hard on your behalf. However, to make your SIP successful and meaningful, it is essential that you avoid some common SIP mistakes. What are these common SIP mistakes and how to avoid them?
You must have heard the piece of wisdom that it is never too late to start planning and saving. However, if you want to get the full benefits of SIP, it is best to start early. The table below gives 4 scenarios to explain why to start a SIP early.
Particulars
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SIP for 25 years
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SIP for 20 years
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SIP for 15 years
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SIP for 10 years
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SIP Invested in | Equity Funds | Equity Funds | Equity Funds | Equity Funds |
Annualized CAGR | 14% | 14% | 14% | 14% |
SIP Tenure | 25 years | 20 years | 15 years | 10 years |
Monthly SIP Amount | Rs.8,000 | Rs.12,000 | Rs.16,000 | Rs.20,000 |
Total Investment | Rs.24.00 lakhs | Rs.28.80 lakhs | Rs.28.80 lakhs | Rs.24.00 lakhs |
Final SIP Value | Rs.2.18 crore | Rs.1.58 crore | Rs.98.06 lakhs | Rs.52.42 lakhs |
Wealth Ratio | 9.08 times | 5.49 times | 3.41 times | 2.18 times |
The sooner you start the more your capital generates and your returns generate more returns. That is evident from the wealth ratio of the 25 year SIP.
Technically, the SIP can be on equity funds, debt funds or liquid funds. But, if your intent is to create wealth in the long run, equity funds are the best option. By earning 5% on liquid funds, there is only so much wealth you can create. In the long run, the risk-return reward is extremely favourable for equity funds.
Don’t commit the mistake of selecting dividend plans (IDCW). Dividends reduce your corpus and are also tax inefficient. Instead, opt for a growth plan which has in-built reinvestment of fund returns. SIPs are normally used for long term goals and it is easier to monitor growth plans against long term goals than dividend plans.
For a SIP to be successful, there are two pillars. There should be a goal (retirement, child education, second home etc) that your SIP is specifically tagged to. That gives purpose. Second is having discipline. Once the SIP starts, all payments must be on time and never stop the SIP, unless it is absolutely unavoidable. Let time work in your favour.
The truth is you don’t need to time your SIP. Even if you are great at timing, it makes little difference to SIPs overall. In SIPs, it is time in the SIP that matters more than timing. Another common time mistake is opting for SIP on sector funds and thematic funds because they are very popular. A long term SIP, should ideally be on a diversified portfolio only.
As Sachin Tendulkar says, mutual funds are not magic funds. Same applies to SIPs. Don’t expect your SIP value to double in 4 years. You may have been lucky once, but that is not the rule. Don’t believe that SIPs are always on auto mode. These SIPs have to be regularly monitored against your goals and appropriate changes made where warranted.
You can get it right by not getting the basics wrong.
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