People have been seen to invest in mutual funds through SIPs but even after being 5-6 years old, their returns don’t show anything special. Any good wealth is not being created.
If you also invest through SIP, then you must not make these mistakes, then it will help you to achieve your goals at the right time. Also, the benefit that is being received in SIP will be more beneficial than before.
Mistakes to avoid in SIP
1. SIP Installment amount
Many investors make mistakes in choosing the right SIP installation. Most of the investors start investing the maximum part of their income through SIP at an early age.
At a young age, you have fewer responsibilities, but with increasing age, your responsibilities keep increasing. You may face car loan, home loan and other family obligations.
If your income does not increase substantially then you may have to cut your SIP installment which may not be enough to achieve your goal on time.
What you should do???
SIP means Systematic Investment i.e. you have to make a financial strategy for SIP. You can start SIP as per your requirement and goals.
Increasing the SIP amount in the beginning and reducing it later can make your goals out of reach for you. Therefore, choose the SIP amount only after anticipating your upcoming responsibilities.
2. Short Term SIP
We are many such investors who want to make good wealth from SIP in a short span of time. This is considered the biggest mistake while doing SIP.
If you are doing SIP in Debt Fund then two-three years is fine according to your goal but when it comes to equity SIP then you have to give it at least 5 to 7 years time.
In Equity SIP, you are exposing yourself to big risk by choosing a short time frame. Rupee cost averaging is available in SIP, but if you hold SIP only for a short time, then you will not get any special benefit of average cost.
Hence, go for long-term SIPs to get good inflation adjusted returns. These long durations create a good balance between your risk and returns.
3. Stopping SIP
A big mistake that investors make is they stop their SIP. There can be two reasons for stopping a SIP by an investor-
- Money problem
- Market Volatility
I have already mentioned the problem of money in the first point. To get rid of this problem, always choose a SIP amount that you can pay regularly. Choose the amount of SIP installation according to your budget.
Some investors stop or pause their SIP due to market volatility. I would like to tell them only one thing if you can do that then you should invest in share market.
SIP is a regular investment plan. In this you should keep investing in every market condition. Never try to time the market. By not depositing SIP installation in between, your compounding makes a lot of difference.
If the stock market is down, then you can make additional investment in your SIP, due to which your cost will be more average and you will get more profit.
4. Investing in More Funds
As an investor, we start SIP in multiple funds to diversify the risk. For example, you are running a SIP of ₹ 3,000 in a mid cap fund and you started SIP by choosing three different mid cap schemes of ₹ 1,000.
It is not considered a good option at all. This will over diversify your portfolio. This can have a negative impact on your returns.
By taking different funds of the same mutual fund category, you may also face the problem of fund overlapping. Fund Overlapping means that you have taken different schemes of the same category but most of the stocks are common in them.
There may be times when you split your same SIP and distribute it on different dates. This can be a good option but keeping SIPs on different dates can lead to default of SIP installments due to insufficient balance in the bank at that time.
If you have only one fund of each mutual fund category, then it is considered best. Although there is no standard for maximum funds, but still you should not have more than 5 funds in your portfolio.
5. Ignoring the Risk Profile
Many investors do not invest according to their risk profile and later panic very quickly. Equity SIP always carries risk which is very high in the short term.
Risk profile tells you how much risk you are willing to take. If you are such an investor who cannot take any risk at all and invest in equity SIP. In this, you may see your returns in the negative in the short term and you may get panic and sell your investment at a loss.
Similarly if you are an investor who can take a little risk but you have invested in small cap funds. Even in this situation, small cap is not considered a good option for you. You can invest in bluechip funds in this category.
Therefore, funds should be chosen according to their risk appetite. At young age you can take more risk but if you are older like above 50 years then you should not take much risk.
6. Not Step Up SIP
Not increasing SIP investment over time can be a big mistake of ours. If today you have started SIP with ₹ 2,000, then it does not mean that you should continue with SIP of ₹ 2,000 even after 5 years.
Your income increases with time. So accordingly increase your SIP according to your income to achieve your goals fast on time.
This will not only speed up your compounding but will help you achieve your goals faster.
7. Not reviewing the portfolio from time to time
Just as it is important to invest regularly in an investment plan, it is also very important to review your portfolio from time to time. Tracking your portfolio from time to time can help you determine if you are on the right track.
SIP is not an investment in which you have to check your portfolio everyday. But you must review your mutual fund portfolio at least once in a year.
This is because if your SIP scheme is underperforming, then you can replace it with another scheme. So that you will not find it difficult to achieve your goals.
8. Waiting for the Perfect Time
“Time in the Market is better than timing the Market”
Many investors also keep waiting for the right time to start SIP. Thinking that the markets are overvalued right now, start a SIP when the market is down. Doing so spends a lot of time.
There is a game of all time in SIP, the more time you give to your SIP, the faster your compounding will be. SIP is an investment that allows us to average out the cost. Therefore, if you want to start in SIP, then there can be no perfect time for it.
SIP investment is a tool that gives exposure to equities to your portfolio and boosts your returns.
Disciplined and regular investment in SIP helps in achieving your goal. It is very important to increase the SIP amount from time to time, review the portfolio and keep the SIP regular.
Therefore, invest in SIP, but keep all the above mentioned things (SIP Mistakes) in mind so that the purpose for which you have started SIP can be fulfilled.