With Systematic Investment Plans, individuals can invest a fixed amount regularly into a mutual fund that aligns with their profile. Their simplicity, flexibility, and accessibility, combined with the benefits of diversification and professional management in mutual funds, have made SIPs a popular choice among investors in our country. While SIPs are quite easy to use, there are still some common SIP mistakes investors tend to make that can be costly in the long run. So let’s understand what these common mutual fund SIP mistakes are and how you can avoid them.
Importance of Avoiding SIP Mistakes
While SIPs are considered a safer and more hands-off investment option compared to direct equity investing, it’s still important for investors to stay careful and avoid common mistakes to keep their financial future safe. Even small missteps at the start of your investment journey can have some big consequences down the road. You might select a mutual fund that doesn’t align with your goals or risk tolerance, neglect to monitor your investments, or follow advice from friends or relatives without proper research.
These mistakes can waste your valuable time. You might earn minimal returns and lose opportunities for compounding growth over the years. In some cases, you might even lose money by investing without the right knowledge or guidance. Worst of all, setbacks like these can destroy your confidence and motivation to invest, which will put your financial future in jeopardy.
Common SIP Mistakes to Avoid
We’ve listed ten common SIP investment mistakes that mutual fund investors should avoid:
1. Stopping SIPs During Market Downturns
Whenever the market experiences downturns and conditions become bearish, investors tend to get anxious. In a panic, they make poor decisions like stopping their SIPs completely. Their logic is that stopping investments during a market slump will prevent any more losses. However, when it comes to SIPs, this kind of thinking is counterproductive. This is because SIPs take advantage of fluctuating markets through rupee cost averaging. Over time, this phenomenon averages out the overall cost of your investment.
When the markets are down and the prices are low, you can buy more units of your mutual fund at the same SIP amount. When the markets eventually recover, the units you bought at lower prices will contribute to higher overall returns.
2. Not Aligning SIPs with Financial Goals
Each ongoing SIP should be associated with a particular financial goal. For example, if you are investing to build a retirement fund, you should choose an SIP that matches both your time horizon and risk tolerance. Long-term goals like retirement allow you to take on more equity exposure, which offers higher returns over time. That’s why setting specific and clear financial goals is one of the first steps of financial planning.
Goals define where you want to be in the future so you can structure your investment strategy in a way that makes sure you stay on track and achieve them without any problems. Goals also help you focus on your long-term vision, which prevents you from making impulsive decisions during market ups and downs.
3. Investing Without Sufficient Research
One of the most common mutual fund SIP mistakes individuals make is blindly following the investment choices of friends and family. They assume that because their peers have had success with a particular mutual fund scheme in the past, it guarantees the same result for them. However, what worked for someone else does not necessarily mean it would also work for you.
Everyone has different financial situations, goals, risk tolerances, and investment horizons. You should research a fund based on indicators like its performance over the past 3, 5 or 10 years, how well the fund manager handled different market conditions, risk-adjusted ratios, exit loads, expense ratio, and AMC’s assets under management, and make sure that the fund aligns with your financial goals, risk appetite, and investment horizon.
4. Ignoring Fund Performance Over Time
A mutual fund’s performance can fluctuate from year to year. One year, it may deliver high returns and outperform your expectations, while the next, it could underperform due to a variety of reasons. Many investors make the mistake of ignoring these changes. They assume that a fund will consistently deliver the same results. However, no fund is immune to changing market conditions, and ignoring its performance over time can hurt your investment plan.
Before you invest, you should thoroughly analyse the fund’s performance over various time periods such as the last year, the last 3 years, and the last 5 years. This gives you a much bigger picture of how the fund has performed across different market conditions. What you should be looking for is consistency. If a fund shows steady performance across different time frames it’s a sign that the fund is being managed well. This stability is important for reliable financial planning, as it reduces the risk of unexpected losses and helps make sure that your investments stay on track to meet your goals.
5. Underestimating the Power of Compounding
In an SIP, the returns are compounded over time, meaning the interest you earn on your investment also earns interest. Even Albert Einstein once called compound interest the ‘eighth wonder of the world’. He said “He who understands compound interest, earns it. He who doesn’t, pays it.” The effect of compound interest is most apparent during the later years of the investment.
This is why to maximise the benefits of compounding, you should start early and stay invested for the long term. You can also use an SIP calculator to see just how big a role staying invested for long plays in compounding.
6. Choosing an Unrealistic SIP Amount
When selecting your SIP amount, you should keep your current financial situation and future goals in mind. If you select an amount that is too high you can strain your budget and selecting an amount too low may not help you generate the returns needed to meet your financial goals. The key is to strike a balance and select an amount that doesn’t stretch your budget thin while being sufficient to achieve your future financial goals. Again, an SIP calculator can be a valuable tool you can use to determine the right SIP amount for you.
Even if your financial situation does not allow you to invest a big amount, you should opt for flexi SIPs that allow you to increase the SIP amount as your financial situation changes. This is because an early start can give you the ability to harness the power of compounding more effectively over time, and you’ll also be taking the first step to securing your financial future.
7. Overlooking SIP Tenure
Your SIP’s tenure should match your financial goals so you don’t stop it early or extend it unnecessarily. For example, if you are planning for your child’s higher education and you estimate you’ll need the funds in 12 years, you should select an SIP that matches your investment horizon.
Generally for long-term goals such as this investors should opt for equity mutual funds as they offer higher returns and the risk associated with them goes down the longer the SIP goes on. As you get closer to your goal, you can slowly shift your corpus to a more conservative investment option, such as a debt mutual fund to preserve your capital and reduce risk.
8. Lack of Diversification in SIPs
Diversification is a risk management technique. Through diversification, you spread your investments across a variety of assets to reduce risk. That way, you can reduce the impact of any single investment’s poor performance on your portfolio. Mutual funds are inherently diversified because they invest in a range of securities such as stocks, bonds, and other assets within a single fund.
However, you can still further diversify your SIPs by investing in a mix of different mutual fund categories, like equity, debt, and hybrid funds. For example, investors looking to solely accumulate wealth in the long term invest in different categories of equity funds. They allocate a larger portion to the relatively safer large-cap funds and invest the rest in mid and small-cap funds to capitalise on their growth potential.
9. Focusing Only on Past Returns
Analysing the past returns of a fund is crucial, but it’s not the only factor you should consider when selecting a mutual fund. If a fund has performed well in the past, there is no guarantee it will also do so in the future. When you are evaluating a fund’s past returns, make sure to look for consistency over different time frames such as 1 year, 3 years, and 5 years rather than focusing on a single year.
You should also consider other factors such as the fund manager’s track record, the AMC’s reputation, risk-adjusted returns, fees and charges, and lock-in period.
10. Not Reviewing SIPs Periodically
As with any investment, it is important to regularly monitor your SIPs, even though they are considered a more hands-off option. Over time, the market conditions, fund performance, and your financial circumstances change, so it becomes vital to ensure that the fund’s goals are still aligned with your own financial goals and risk tolerance. If you find that the fund is no longer meeting your expectations, you will have to adjust your investment strategy by reallocating your investments, changing the fund, or altering your SIP amount.
How often you need to review your SIP is also important. If you do it too frequently, like every two months, you may grow anxious and make impulsive decisions based on short-term market fluctuations. Generally, you should conduct a review annually or semi-annually as it gives you a clearer picture of your fund’s performance. If a fund underperforms consistently for 2 or 3 years you should consider exiting it.
How to Avoid SIP Mistakes
1. Start Early
The earlier you start the more time your investment gets to grow. SIPs offer flexibility and accessibility, so it’s easy to start small and increase the amount over time.
2. Don’t Skip Due Diligence
Take the time to research your options thoroughly before committing to an SIP. Understand the mutual fund’s goals, historical performance, management team, and fee structure before making any decisions. Also, assess the fund’s risk profile and make sure it aligns with your own.
3. High Returns Aren’t Everything
High returns come with high risk. Short-term returns can paint a false picture, as they may not accurately represent the fund’s long-term performance or its consistency.
4. Set SMART Goals
Make sure your financial goals are Specific, Measurable, Attainable, Relevant, and Time-bound. Your goals are a crucial factor when selecting an SIP.
5. Assess Your Risk Tolerance
Your risk tolerance is not just about how much risk you are willing to take on, but also how much risk you can afford to take. It takes into account several factors such as your age, financial situation, investment goals, time horizon, and financial responsibilities. Once you understand your risk tolerance you will be able to select a fund that suits your profile.
6. Monitor Your SIPs
Market conditions are always changing, and they affect how your fund performs. Likewise, changes in your financial situation can impact how well your SIP aligns with your goals. At least once a year, take the time to review your SIPs so you can make sure they stay aligned with your investment strategy.
7. Don’t Ignore Step-up SIPs
Step-up SIPs are a type of SIP that allows you to increase your regular contribution amount every year, either as a percentage or a fixed amount. For example, you can set your SIP amount to grow by 10% every year, or simply by Rs. 2,000 annually. This is especially beneficial for salaried individuals as their income grows reliably and their investment can reflect that.
8. Don’t Panic During Market Downturns
SIPs have the benefit of rupee cost averaging. When the prices are low, you’ll buy more units when the market is bearish and earn higher returns in the long run.
9. Consult A Financial Advisor
A financial advisor can expertly assess your financial goals and risk tolerance. They can give you unbiased and personalised advice on selecting the most suitable SIPs and help you make an effective investment plan. Financial advisors can inform you about the tax implications of your SIPs, and also help you monitor your portfolio so you can make adjustments whenever necessary.
Conclusion
When used correctly, SIPs can be a great wealth-building tool for investors. Before you start your SIP journey, making a small decision like consulting with an investment advisor can go a long way. With a professional’s guidance, you can sidestep common SIP mistakes completely, make informed choices, and create a personalised investment strategy that aligns with your financial goals and risk tolerance. Even small SIP investment mistakes today can turn costly tomorrow, so by heeding expert advice, you make sure that your investment decisions are well-informed from the start.
