Miracle of SIPImage Credit source: ai generated
Investing in equity mutual funds through Systematic Investment Plans (SIPs) gives you the benefits of discipline, convenience and compounding. SIPs allow you to invest regularly every month, giving you the benefit of ‘rupee-cost averaging’ and compounding of funds. Thus, it has the potential to give higher returns over time. But whether it will help you achieve your targets also depends on many other factors. Many investors start investing in equity mutual funds through SIPs, but end up making mistakes that limit their returns. But the good news is that these mistakes can be avoided and are easy to fix. Let us also give you detailed information about those mistakes, which you can avoid making.
1. Stopping SIPs during market downturn
Market fluctuations often create panic among investors, causing them to pause or stop their SIPs. This is one of the biggest mistakes, as it can brake the compounding process. SIPs work best during market downturns, as it helps you accumulate more units at lower prices. Therefore, it is important to remain consistent with SIP investments, and view market downturns as an opportunity and not a threat.
2. Not increasing the SIP amount over time
Many investors start SIP, but they never think twice about its amount. Ideally, the amount contributed to your SIP should increase every year in line with the increase in your income. This will help you beat inflation, accumulate a larger corpus, and even achieve your goals faster. To increase your SIP contribution over time, you can choose the ‘Step-up SIP’ feature. This facility lets you automatically increase your installment by a fixed amount or percentage every year.
3. Chase the best performing funds recently
It is often seen that investors chase funds only on the basis of recent high returns. But in our opinion, this strategy can lead to disappointment. This is because markets are cyclical; This means that the funds which were winners yesterday, will not necessarily remain winners tomorrow also. So, instead of chasing past winners, focus on schemes that have the potential to perform consistently over the long run, have appropriate risk levels, good fund management quality, and sensible investment strategies.
4. Investing without any clear target
If you are investing in SIP without any goal in mind, it can make the important task of choosing a fund difficult, and you may end up choosing a wrong or less profitable option. Apart from this, investing without any target amount can make it difficult for you to decide the right investment amount. The result may be that you get confused, get less than expected returns, and withdraw your money prematurely. Therefore, it is important to adopt a goal-based investment approach. For this, set different goals like retirement, children’s future, buying a house, and set a specific amount and time limit for each goal.
5. Too much diversification
Spreading SIPs across multiple funds can clutter your portfolio and reduce returns. You will have a little bit of everything, but not enough of anything to make a big profit. Generally, investors should limit their investments to a manageable number depending on the amount of their investment. Generally, 5-10 well-managed funds are sufficient to meet different financial goals.
6. Ignoring asset allocation
Asset allocation means dividing investments among different asset classes to reduce risk. Past data shows that right asset allocation is the key to successful wealth creation. On the contrary, relying on just one asset class can lead to high market volatility and increased concentration risk. Therefore, depending on your age, income, risk appetite, financial goals and investment time horizon, you can consider creating a right mix of different asset classes like equity, debt and gold.
7. Not reviewing SIP performance
You may have many long-term goals that require maintaining investments for a long time. But if you adopt the ‘invest and forget’ approach, then this approach can prove to be harmful for you if the performance of the funds is poor. To fix this problem, review your investments at least once a year. Replace feds whose performance consistently lags behind their benchmark and category averages.
8. Making decisions based on emotions
During a market correction, your SIP returns may go down, or even lead to losses for new investors. In such situations, investors often panic and sell their investments. Remember that market decline happens only for some time. If you sell your investments at such a time, you will miss out on the next recovery in the market. If you stay focused on your long-term goals and avoid reacting immediately to every small ups and downs in the market, it can help you get better returns in the future.
9. Starting to invest without an emergency fund
Many people start investing as soon as they start earning. But they forget to prepare for sudden needs or difficult situations (contingencies). If you do not have any financial backup, you may have to pause or withdraw your SIPs during an emergency, which may hamper your financial goals. So, before you start investing, make sure that you have built an emergency fund that covers at least 3-6 months of expenses. This will provide you financial stability and your investments will continue even in difficult situations like job loss or sudden increase in expenses.
10. Expecting unrealistic returns
A sustained market rally often tempts investors to take more risks in the pursuit of higher returns. However, expecting guaranteed or very high returns from SIP may lead to disappointment. A wiser approach for investors would be to have realistic expectations. In the long run, equity funds usually give returns in the range of 10-12 per cent per annum. Using this as a benchmark when planning your goals can help you get an idea of how much money you need and how much you need to invest regularly to achieve it.
