A systematic investment plan or an SIP is one of the most effective ways to invest in mutual funds and build wealth over the long term. However, many investors make common mistakes when starting an SIP that reduces their returns and impacts their investment goals. Using an SIP calculator is a great way to avoid these mistakes and maximize your returns in a mutual fund investment.
Do your research before investing
Many investors start an SIP in a mutual fund scheme based just on the recommendation of a friend or family member. It is important to do your own research to choose a fund that suits your investment objectives and risk appetite. Compare different funds based on their historical performance, fund manager expertise, asset allocation, and other parameters to make an informed choice. An SIP calculator can help compare different funds by calculating their projected returns over your investment horizon.
Choose a suitable investment period
Another common mistake is choosing an SIP investment period that is too short to meet your investment goals. For the power of compounding to work its magic and generate inflation-beating returns, you need to stay invested in the stock market for at least 7-10 years or longer. Use an SIP calculator to determine how much you need to invest monthly to reach your investment target. Then choose a suitable investment period based on the calculated monthly SIP amount that you can comfortably invest each month.
Opt for indexation to beat inflation
Many investors do not increase their SIP instalments annually to account for inflation which reduces their purchasing power. To generate good returns from your SIP, it is important that your investments beat the average inflation rate. Using an SIP calculator, you can build an inflation-adjusted investment plan by increasing your SIP amount each year based on the expected inflation rate. This can help your investments generate better inflation-adjusted returns over the long run.
Review and rebalance your SIP
Another common mutual fund investment mistake is not reviewing and rebalancing your SIP investments periodically based on your changing financial needs and market conditions. You need to track how your SIP funds are performing and make changes if required to achieve your investment goals. You may need to increase your SIP amount, change your asset allocation or switch schemes if your existing funds are underperforming. An SIP calculator comes in handy to determine the required changes to get your investment plan back on track.
Conclusion
While an SIP is an excellent way to generate wealth in the long run, you need to invest smartly to maximize your returns. By avoiding these common mistakes and using an SIP calculator, you can make informed investment decisions, choose suitable schemes, set the right investment period and investment amount, and stay on course to achieve your financial goals. Staying disciplined, doing regular reviews and making necessary corrections as needed will help you make the most of your SIP investment.