So you are starting a Systematic Investment Plan. That is a good decision.
But wait there are some mistakes that people make when they start a Systematic Investment Plan. I have seen this happen many times.
Let me help you avoid these mistakes. Here are five common mistakes that people make. And how to avoid them.
I will keep this simple. Do not think much about it.
Let us start.
Mistake Number 1: Starting with Too Small an Amount
Starting with ₹500 per month is okay. It is better than not investing at all.
The problem is that people start with a small amount and never increase it.
After five years they are still investing the same amount. This is not good because inflation will reduce the value of their money.
What to Do Instead: Start with an amount that you’re comfortable with. Then increase your Systematic Investment Plan by 5-10% every year. Set a reminder to do this automatically.
For example a Systematic Investment Plan of ₹2,000 that increases by 10% every year will be better than a Systematic Investment Plan of ₹2,000 that stays the same.
Does this make sense?
Mistake Number 2: Stopping the Systematic Investment Plan When the Market Falls
This is a mistake that people make.
When the market falls people get scared and stop their Systematic Investment Plan.. This is not the right thing to do.
A falling market is actually a good thing for your Systematic Investment Plan. This is because you can buy units of your investment when the price is low.
Let me give you an example:
- When the market is high your ₹5,000 can buy 10 units
- When the market is low your ₹5,000 can buy 15 units
You want to buy more units when the price is low. This will reduce your average cost.
Stopping your Systematic Investment Plan when the market falls is like stopping your grocery shopping because pricesre low. It does not make sense.
The Fix: Do not check your investment portfolio every day. Just set it up and forget about it.
Mistake Number 3: Choosing the Wrong Type of Fund
Not all funds are the same.
A small-cap fund is different from a large-cap fund. A mid-cap fund is different from a fund.
Here is a simple rule to follow:
Short Time Horizon (1-3 Years): Choose a debt fund or an ultra-short duration fund. These funds are risk and low drama.
Medium Time Horizon (3-7 Years): Choose an hybrid fund. These funds have some equity and some debt. They are a middle path.
Long Time Horizon (7+ Years): Choose an equity fund. These funds are risk and higher return.
Choose a fund that matches your goal. If you have a short-term goal do not choose a small-cap fund. That is like gambling, not investing.
Is this fair?
Mistake Number 4: Ignoring Expense Ratios
Let me explain this to you.
Every mutual fund charges a fee. This fee is called the expense ratio.
A 1% fee versus a 1.5% fee may not seem like a lot.. Over 20 years it can make a big difference.
Let me give you an example:
You invest ₹10,000 per month for 20 years. The expected return is 12% per year.
Fund A has an expense ratio of 0.5%. Fund B has an expense ratio of 1.5%.
The difference after 20 years is ₹25 lakhs.
This is a lot of money. Just because of fees.
The Fix: Check the expense ratio before you invest. For equity funds choose a fund with an expense ratio of than 1%. For index funds choose a fund with an expense ratio of less than 0.5%.
Low fees do not guarantee returns.. High fees can reduce your returns.
Mistake Number 5: Having No Goal or Timeline
This is the biggest mistake of all.
People start a Systematic Investment Plan because someone told them to. But they do not have a goal or a timeline.
Without a goal you will. Start your Systematic Investment Plan randomly. Without a timeline you cannot choose the right fund.
Ask Yourself These Questions:
- What am I saving for? (For example retirement, a house or my childs education)
- How years from now do I need the money?
- How much money will I need? (Just a rough estimate is fine)
Even simple answers can help. For example “I want to save ₹50 lakhs in 15 years for retirement”. This is enough to work with.
Without a goal you will not have discipline. Without discipline you will quit when things get uncomfortable.
And things will get uncomfortable sometimes. The market will go up. Down.
Take a deep breath. This is not complicated. Just write down one goal today.
One More Thing…
By the way if you want to see how different Systematic Investment Plan amounts and timelines work you can use our calculator at dailymixdose.com. Just plug in your numbers. See what happens.
It is free. No sign up required. Just play with the numbers.
Quick Recap. The 5 Mistakes to Avoid
- Do not start with small an amount and never increase it
- Do not stop your Systematic Investment Plan when the market falls
- Do not choose the wrong fund for your timeline
- Do not ignore expense ratios
- Do not have no goal or timeline
Fix these five mistakes. Your future self will thank you.
The truth is, a Systematic Investment Plan is a tool.. Simple does not mean easy. Discipline is the part. Not the math.
Do you understand far? Good.
Now go start your Systematic Investment Plan. Or if you have already started go check if you are making any of these mistakes.
Disclaimer: This article is for educational purposes only. Mutual fund investments are subject to market risks. Past performance does not guarantee future returns. Please consult a registered financial advisor before making any investment decisions.