5 Mistakes One Must Avoid While investing through SIPs

Published On: 24-Apr-2020

Systematic Investment Plan (SIP) allows the investors to invest in a mutual fund scheme of their choice at periodical intervals. It automates the investment process once the investor has completed the registration process, as the investments continue to be regularly made irrespective of market ups and downs. With several SIP benefits, the retail investors have continued to prefer SIP investment as reflected by the AMFI (Association of Mutual Funds in India) data regarding monthly SIP inflows. The monthly SIP inflows have continued to sustain above Rs. 8,000 crores for more than a year now (Source – AMFI, data as on 29th February 2020). 

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While the retail investors continue to invest through SIPs, they must also take care that they avoid investing mistakes while on the journey to achieve financial goals. Here are five mistakes one must avoid while investing in mutual funds through SIPs:

1. Waiting for the right time to Start a SIP :

 This is one of the most crucial investing mistakes to avoid. By planning to time the SIP investments, the investors may defeat the primary purpose of SIP investment, i.e., investing across the market movements. It generally happens that the wait for the right time continues forever. A wise man once said, “the best time to plant a tree was twenty years ago; the second best time is now.” The same analogy may be applied to mutual fund investments as well. Instead of waiting for the right time, the present time needs to be considered as the best time to start SIP investments. This not only helps the investors to start investing in their financial goals at an early stage but also allows more time for the investors to reap the benefits of compounding in a better manner. 

2. Discontinuing SIP in Volatile Markets :

Investors often tend to terminate their existing SIPs during the time markets are shaky and volatile. In simpler terms, this is another version of the investors aiming to time the markets, by deciding against future investments to prevent further loss. However, the investors fail to realize that when the markets are falling or have already fallen, there is an exciting opportunity to invest at lower valuations and average the cost of investments. Further, stopping the existing SIPs may also pause the journey towards the achievement of financial goals and, thus, hamper the financial plans. Instead, the investors should believe in the long-term growth story of the markets and continue investing in mutual funds through SIPs.

3. Setting Unrealistic Investment Plans:

Generally, it happens that to achieve the goals at an early stage, the investors tend to set higher investment targets without considering their income sources, monthly commitments, etc. While one may stretch the financial resources for a couple of months, it may cause the investors to stop the SIPs much earlier before the financial goals may be achieved. As such, it is always advised that the investors stay realistic with their financial goals as well as the financial plans, else the investment journey may get derailed. 

4. Not Choosing Step-up SIPs :

Step-up SIP refers to such a SIP, which increases the monthly investment amount at fixed intervals or on specific triggers. Such a SIP allows the investors to increase their investments with the increase in their income, which will happen over time. Choosing a step-up SIP not only increases the monthly savings quotient for the individual but also increases the final investment corpus to fulfill different financial goals. For example, if one is investing Rs. 5,000 per month for 30 years, one may accumulate an investment portfolio of Rs. 1.76 crores as against the total investment of Rs. 18 lakhs (assuming the investments generate annualized returns of 12% per annum). On the other hand, if one increases the SIP amount by 10% per year, i.e., Rs. 5,000 in year 1, Rs. 5,500 in year 2, Rs. 6,050 in year 3 and so on, the total investment portfolio will be valued Rs. 4.42 crores as against the investment of Rs. 98 lakhs over the period with assumed investment returns and time period remaining the same. 

5. Not Reviewing the Portfolio Performance :

Just like it is essential to invest regularly, it is equally important to review that the financial plan stays on the right track to achieve the financial goals in time. One must undertake the review of the portfolio performance regularly, at least once in a year, so that the underperforming schemes may be identified and replaced with better performing schemes. Further, such a review will also help the investors identify the gaps between the investment performance and the financial goals and act on a timely basis. 

Reregistering a SIP is the right step towards building financial discipline, investors must avoid the above mistakes and steer through their investment journey effortlessly.