What are the mistakes that one needs to avoid while going for SIPs?

For the past few years, many investors have become inclined towards SIP mutual funds for meeting their crucial financial life goals. However, just being enticed is not adequate to invest appropriately in mutual funds via SIPs. You as a retail investor must know how you can invest effectively and the fundamental mistakes you must avoid. 

Mentioned here are some mistakes that many investors usually commit, which prevent them from making the most out of their SIP investments. Are you guilty of making them?

  • Not beginning with SIPs early 

Starting your investment early in a mutual fund via an SIP permits you to get the most from the compounding effect. The power of compounding is an important benefit of SIPs that allows the gains from your investments to begin yielding returns on their own, which slowly grows into a huge corpus over a long time period. For example, if you are someone looking to form a retirement corpus equaling Rs 1.93 crore over the 35-year period, then you would need you to invest only Rs 3,000 every month at an assumed return rate of 12 per cent. For forming this same corpus in a span of 15 years tenure at the same rate of return, you would need to make a much higher month-on-month contribution equaling Rs 38,700. Thus, starting with your retirement early would allow you to form a substantial corpus through smaller contributions. 

  • Investing in a low net asset value (NAV) fund via SIPs for higher earnings

Many abide by the misconception that funds with reduced NAVs are cheaper and hence investing in them via SIPs would generate higher returns. However, the NAV of a fund can be low or high owing to distinct reasons. For example, as a fund’s NAV is based on the underlying asset’s market price, the NAV of a well-managed scheme can grow much better than other funds. Similarly, those fund schemes that are newer hold lower NAVs as compared to the older ones as they received a shorter time to grow. 

Thus, you as a retail investor must avoid considering the funds’ NAV when considering investing in SIP mutual funds. You must instead factor in the funds’ previous performance as well as their prospects in the future for selecting a proper fund. 

  • Following a conservative approach and avoiding equity funds investments

The market’s inherent feature is volatility, especially for those investments that are linked with equities. As automated and regular investing via SIPs in equity funds allow you to get the benefit of rupee cost averaging in the course of market downturns or corrections, this mode also allows you to eliminate the requirement to keep track of the market for making your investments. This is because, under an SIP, a predefined amount is invested at a predetermined time irrespective of the market movements. As an outcome, you tend to buy quality stocks at lower market costs during bearish markets and vice versa during bullish markets. This process of automatic deduction allows you to gain the rupee cost averaging benefit and avoid the need to time your investment. 

However, in case you are a conservative investor, you may tend to avoid equities as they are market-linked instruments, which are considered risky, and instead prefer debt mutual funds. Remember that the return yielded by any debt mutual fund has negligible potential of overcoming inflation. Instead, equities are a prudent asset class for mitigating your long-term life goals like building a corpus for your retirement, your child’s higher education/marriage, etc. as they can perform better than fixed-income instruments and beat inflation by a wide margin over the long run. Thus, to achieve your long-term financial goals, you as a retail investor must invest in equity mutual funds via SIPs. 

Ending note

An investment in a mutual fund via an SIP is one of the best ways of forming wealth over the long term. However, to make your SIP investment work, you need to stick to the basics. The very term “SIP” is suggestive. This route is based on the grounds that if you continue making small bits of investment over a long time period, then you would ultimately grow periodical investments into a huge corpus. However, you must avoid falling prey to the above-mentioned SIP investment mistakes.