7 Mistakes to Avoid When Investing Through SIPs
By Akhil Chugh
Date June 30, 2024
Mutual funds are an excellent way for investors to engage with the stock market, offering a pathway to long-term wealth creation and financial goal achievement. They carry relatively lower risks compared to direct equity investments while providing comparable returns. This advantage stems from the professional management of mutual funds and their diversified portfolios, which help spread and mitigate risk.
When investing in mutual funds, investors can choose between a lump-sum investment or a Systematic Investment Plan (SIP). For instance, a lump-sum investment involves placing a significant amount, such as Rs 10 lakh, into mutual funds all at once. Conversely, an SIP involves investing smaller, regular amounts, such as Rs 30,000 per month, over a period of years.
Generally, the SIP mode offers a more convenient way to invest in the equity market for long-term wealth creation. Some key benefits of investing in mutual funds through SIPs include:
- Inculcating financial discipline
- Rupee cost averaging, making market timing irrelevant
- Leveraging the power of compounding
- Efficiently reaching financial goals
- Providing a convenient investment mode
Despite these advantages, many investors make mistakes that can lead to losses or miscalculations in their SIP amount or target amount. Here are seven key SIP mistakes investors should avoid to maximize their SIP investments.
7 Key Mistakes To Avoid When Investing in Mutual Funds Through SIPs:
1. Starting Late:
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.
Investments grow over time. When one starts investing early, one gets a considerable head start over others in similar situations who start late. Compound interest was referred to by Einstein as the eighth wonder of the world and rightly so. Just like investing early gives a head start, it also brings with itself the wonderous compounding effect. However, even if you have a late start, regular investments can help in making up for the lost time if you keep on topping up your SIPs with rising income.
In the investment world, time is your biggest friend. Time creates money. The earlier you start, the easier it is!
2. Stopping SIPs in volatile markets:
This is one of the most common mistakes investors make when starting SIP plans. Even though they start out with great enthusiasm, but little volatility in the equity market makes them stop their existing SIPs.
In simpler terms, this is another version of the investors trying 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 toward 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.
Ignore the market movements when investing through SIPs to reap the benefit of rupee cost averaging and invest in the category of funds matching the investment tenure and your financial goals.
3. Ignoring Financial Goals:
Investing without clear financial goals is like sailing without a destination. It’s essential to align your SIP investments with your financial objectives, whether it’s buying a house, funding your child’s education, or planning for retirement. Defining your goals helps in selecting the right mutual funds and determining the appropriate investment horizon.
Every individual has life goals that he needs to reach in the short term or long term. Calculating and investing regularly to be able to reach that financial goal is called goal-based investing. For example, if you plan a foreign holiday with your family in early 2026, which is 18 months away, it can be called a short-term goal. If you wish to plan for higher education for your child who is 8 years now, you have 10 years, and it is considered a medium-term goal. If you are 25 years old and have just started working and want to retire at 55, you have 30 years to plan for that goal and it is classified as a long-term goal.
So, it would be a massive mistake if you simply start one or two SIPs in mutual funds without linking it with any goal. Such an investment strategy is equivalent to taking a random train without knowing your destination.
Thus, you must link your SIPs to clearly defined goals (Goal-based SIPs) like retirement, child’s education, child’s wedding, foreign holiday, etc. Then you’ll know precisely how long the project will take, and you’ll be able to plan your SIP accordingly.
Also, you are more likely to continue your SIPs when you start them for specific goals. Because when you have a goal in mind, you are all the more motivated to continue your SIP. You know that you will never achieve your goals if you discontinue your SIPs midway.
4. Not increasing SIPs with rising income:
Starting a SIP at the early stage of your life with a small amount is a good habit as you couldn’t have afforded to invest or commit a large amount considering your income or salary. As you grow professionally, your salary also grows simultaneously so will be your financial goals or aspirations. Thus, it is essential to increase your SIPs with rising income.
SIP Top-ups is an option available to SIP investors wherein they can automatically increase their SIP contributions in the fund they are already investing in. As investor’s income grows with time, they are more likely to have more sum available for investments. SIP Top-ups allow these investors to increase the investment amount periodically.
Some of the benefits of SIP Top-ups are:
- Helps you reach your financial goals faster and you can expand your goals during the time
- Helps you in syncing your investments with increasing income
- Helps you to build a larger corpus
- Top Up automatically accounts for any inflation during the given time period
- A SIP can help you buy your dream home soon, while a top-up could give you the leverage to buy it sooner.
- Allows you to keep investing in an existing plan rather than the hassle of managing multiple SIPs with rising investible income.
5. Not reviewing SIPs performance periodically:
Starting SIP is just the beginning of your investment journey. It is not the end. So, you need to keep monitoring your investments in SIP against your long-term goals and see if they are in sync. Many investors start their SIP and later forget it completely. A lot many people have this misconception that long-term wealth creation means it doesn’t require monitoring at all.
To achieve your goals, it is important that you review your SIPs in different schemes once a year. The review will help you understand which mutual fund schemes have delivered as per your expectation and which schemes have underperformed. If a scheme has underperformed for 18-24 months, you can think of exiting that scheme. And if there is any change in portfolio’s total asset allocation, you can consider rebalancing the portfolio to align it with your risk tolerance and investment objective.
6. Underestimating the Impact of Inflation:
Inflation can erode the purchasing power of your investments over time. Many investors fail to account for inflation when setting their financial goals and investment strategies. Ensure your SIPs are contributing enough to not only meet but exceed your future financial needs after accounting for inflation. Choosing funds with a history of beating inflation can help mitigate this risk.
7. Ignoring Tax Implications:
Another critical mistake that investors often overlook is ignoring the tax implications of their SIP investments. Different mutual funds have varying tax treatments based on their type and the duration of the investment. For example, equity mutual funds held for less than one year attract short-term capital gains tax, while those held for more than one year are subject to long-term capital gains tax. Debt funds have different tax rules and holding periods.
Failing to consider these tax implications can affect your net returns and overall financial planning. It’s important to understand how taxes will impact your investments and factor them into your investment strategy. Consulting with us can help ensure that you are making tax-efficient investment decisions.
If the above-discussed mistakes are avoided and the goal, specifically, is well analysed and studied with the help of a financial expert, mutual funds could become a great mode of building long-term wealth.
Key Takeaways from Net Brokers:
- SIP in mutual funds is a great financial tool for investors as it not only avoids timing the market but facilitates them in their wealth-creation journey in a disciplined manner in the long run.
- While investing in SIPs, always think long-term. Stopping SIPs abruptly even if the market starts showing a bearish trend in a short duration is not a wise thing to do. The longer your investment horizon, the higher will be your scope to build wealth from the market.
- While deciding on the monthly SIP amount, assess your overall financial capabilities in the long run. If possible, opt for a plan that allows you to increase periodically the amount you invest.
- Seek professional help from Net Brokers to get the most out of your SIP investments as one wrong move can hamper your investment objectives and deter you from achieving your financial goals.
Start early, stay disciplined, and regularly review your portfolio to make the most of your SIP investments, while also being mindful of the tax implications involved are some of the simple yet effective steps you can take to maximize your wealth creation. Make sure you follow these best practices to get the best out of your mutual fund SIPs.
For more information, get in touch with us today! Download our mutual fund app & start investing for your long-term financial goals.
Happy SIPs!