SIP Mistakes That Mutual Fund Investors Should Avoid

The best way to invest in a SIP is to define your goals that you want to invest for. An investment expert with knowledge and experience can make your investing journey through an SIP more meaningful and purposeful. While the SIP mode of investing has a number of benefits, there are certain things you should keep in mind. In this article, we will discuss some SIP mistakes that mutual fund investors should avoid.

1)  Not Mapping Your Financial Goals to SIPs

Before you start investing, you should have a financial plan with all your financial goals listed. When you start investing, you should map the SIPs to your financial goals. Mapping SIP investments to your goals gives them a purpose or an objective. It makes you a disciplined investor, keeps you focused, and motivates you to continue the SIPs till the financial goals are achieved.

2) Waiting for the Right Time to Start an SIP

Some investors wait for the right time to start their SIP investments. Some of the reasons include:

Accumulating a specified amount of money before starting the SIP investments

Not having the adequate amount to start the SIP. For example, a financial goal may require a monthly investment of Rs. 5,000, but the investor may have an investible surplus of only Rs. 3,000 per month. In that case, the investor may wait till the investible surplus reaches Rs. 5,000 per month

Waiting for a specific occasion to start the SIP. For example, some investors wait for occasions like birthdays, wedding anniversaries, the start of the calendar or financial year, etc., to start their SIP.

Waiting for the market to come down. Some investors feel that the market is trading at high valuations, and hence, they should wait for a correction so that valuations become cheap or reasonable.

It is recommended that you should not wait for a specific market event, personal occasion, or reaching a specific financial amount to start a SIP. The right time to start the SIP is when you have money, irrespective of the date, occasion, amount, market level, etc.

3) Skipping SIPs

Some investors skip SIPs for certain reasons. However, that is not a good practice. Skipping SIP instalments may result in you accumulating a lower amount than expected or taking a longer time to achieve the financial goal.

You should always maintain a sufficient balance in your savings account to execute the SIPs smoothly. Most AMCs send you reminders through SMS and/or email a few days before the SIP date so that you are well aware in advance. Another great way to make sure that your SIP remains active is to use the feature of SIP Pause. Through this feature, if you have to skip your SIP for a few months, you can pause the SIP and restart after a few months. This is effective in maintaining your monthly cash flows.

4) Falling for SIP investing tips Due to lack of access to expertise, Investors sometimes, especially the ones who are beginners at investing in SIPs fall for investing tips by people who do not have the required domain knowledge. This can often lead to misplaced expectations and could result in a loss of investment value due to not following a structured process of investment.

4) Not Opting for Step-up SIP

With a step-up SIP, you can opt to increase the monthly SIP amount by an absolute amount or a percentage on an annual basis. Step-up SIPs can be convenient for investors as they can increase their SIP amount annually as their income grows. A step-up SIP can help you reach your financial goals faster than a regular SIP.

Also, we discussed in the earlier section how some investors have a lower amount of investible surplus (for example, Rs. 3,000 per month) than required for investing towards a financial goal (for example, Rs. 5,000 per month). In such cases, you can start a step-up SIP wherein the monthly investment amount will increase every year as you progress ahead with the SIP.

5) Pausing the SIP Before Certain Events or Redeeming It Midway

Some investors either pause or redeem their investments before a major event. Some of these events include Union and State elections, budget, war, RBI monetary policy, etc. In their long history of several decades, stock markets have seen many favourable and adverse events. In reaction to every adverse event, there is a big or small fall. However, markets always take the event in its stride, recover, and go on to make new highs over a period of time.

So, you should not pause your SIPs before any event. Some investors even redeem their investments before a major event. Every adverse event in which the market falls is an opportunity to accumulate more units at a lower price. Later, when the market recovers and makes new highs, your portfolio benefits from the units accumulated at lower prices during the fall.

6) Choosing the IDCW Option Instead of the Growth Option

While setting up the SIP investment, you get the options of growth and Income Distribution cum Capital Withdrawal (IDCW). In the IDCW option, the returns are given back to you, which reduces the benefit of compounding. However, with the growth option, they are reinvested on your behalf, which helps in better compounding.

For equity mutual funds, you should select the growth option unless you have a specific requirement of regular returns. In the long run, the power of compounding helps you earn good returns and create wealth.

7) Not Monitoring Your SIPs Regularly

You should monitor the performance of your SIP regularly, once in six months or one year. The review helps you analyse the performance of the SIPs as to whether they are on expected lines. If some SIP(s) is/are consistently underperforming, you may replace it with an appropriate scheme.

During the review, you should check your asset allocation also. If a particular asset class has outperformed by a big margin, you should rebalance. For example, equities did well in FY 2023-24, specifically mid, small, and micro-cap funds. In such a scenario, the equity weightage in the portfolio would have increased. During the rebalance, you may book some profit in equity and invest the proceeds in fixed income to revert to the original asset allocation. The other option is to invest additional money in fixed income to raise its weightage and revert to the original asset allocation.

8) Choosing a Lower Timeframe

While doing the SIP set up, you have to select the investment tenure. Some investors select a short-term tenure, such as three or five years. You should select the tenure as per the investment time horizon for your financial goals. Some mutual fund houses give you the option of ‘perpetual’ for investment time horizon. The end date for such SIPs is usually 2099.

You can go with the perpetual SIP option. Once the financial goal is achieved, whether as per its investment time horizon or earlier, you can stop the SIP and redeem the proceeds.

Financial Planning Journey: Take the SIP Route to Achieve Your Financial Goals

SIPs are an excellent tool to accomplish your financial goals in your financial planning journey. They are a simple and convenient way to invest in mutual funds. They can make you a disciplined investor and help you make regular investments for the long term. By avoiding the SIP mistakes discussed in this article, you can sail through your financial planning journey smoothly, achieve your financial goals, and enjoy financial freedom.