SIP Investment: Investors must avoid making THESE 8 mistakes to reap maximum gains

SIP Investment: Mutual funds and SIP (Systematic Investment Plan) have become synonymous when it comes to investment. Be it a new investor or an experienced one, the SIP mode is the most preferred in mutual funds for regular savings, as it is easy and consistent.

According to Vivek Goel, Joint Managing Director, Tailwind Financial Services, data released by the Association of Mutual Funds in India (AMFI) where the SIP flows continue to be resilient at over Rs 10,000 crore for the last 18 months despite markets being volatile.

Although SIPs are an essential and effective investment method, investors often make many common mistakes when investing through SIP. Here are the 8 common mistakes investors should avoid while doing a SIP in mutual funds:

1. Starting SIP too late

The sooner one starts investing, the better the chance of earning good returns through SIP. The most common mistake made by people is waiting to start SIP with large regular savings. To avoid this, experts suggest starting investing early and averaging out. 

Explaining with the help of an example, Amar Ranu, Head - Investment products and Advisory, Anand Rathi Shares and Stock Brokers says, "If one starts SIP of Rs 10,000 per month at the age of 30, then it would grow up to Rs 5,55,70,556 in the next 30 years at an expected return of 14 per cent. On the other hand, if one starts even 5 years later, say at the age of 35, then the same corpus would grow to only 2,72,72,777 — so almost half, due to a delay of 5 years.” 

2. Pausing your SIP in a volatile market

Fear of losing money in a volatile market can create panic, and in that panic, investors tend to sell their positions or pause their SIPs — something that will likely lead to inefficient portfolio performance, says Vivek.

According to Varun Girilal, Managing Partner, Scripbox, it is essential to give investments enough time — at least 7-10 years — for the strategy to play out.

He added that research has shown that continuing SIP during market downturns can make a huge difference, as investors get to accumulate quality equity-based mutual funds at lower valuations.

3. Failing to link SIP to specific goals

Goals are planned expenses — say for a new bike or a car to a new home, even a vacation or wedding, and linking these goals to the SIP investments helps in getting a better idea of long-term savings. 

Varun believes that it is crucial to map SIPs and rebalance the portfolio. He suggests opting for debt-based mutual funds for short-term goals and gold and equity-based mutual funds for goals that are at least 5 years away. 

4. Choosing the dividend option over the growth option

The criteria for deciding which is a better plan between growth and dividend varies from investor-to-investor, depending upon their investment object. However, generally, the growth option of mutual funds is better than the dividend option in long term.

According to Ranu, following are the reasons one should opt for a growth option rather than a dividend:

1. Mutual fund dividends do not create value; instead, they distribute it. As a result, there is no wealth creation or appreciation with the dividend option.

2. An investor has no control over when mutual fund dividends are declared.

3. In most cases, mutual fund dividends are taxed at a higher rate than capital gains from mutual fund schemes' growth options.

5. Opting for a short investment horizon

The shorter the tenure the more exposure to the greater risk of market volatility and loss. It is necessary to comprehend that SIP rupee cost averaging over multiple market cycles has a much lower risk of loss and contributes to long-term wealth creation/inflation-adjusted returns as Ranu explains the simple reason for having a long haul is compounding benefits and lower risk. 

Also Read: Tax-saving FDs: These banks offer up to 8.5% interest on fixed deposits 

6. Underrating the step-up option

To keep one’s investment growing it is necessary to also keep increasing the corpus. Increasing or stepping up SIP instalments annually at a fixed rate helps accumulate a larger amount.

Varun explains this with an example. If investors make it a habit to increase their monthly SIP by 10 per cent every year, assuming a 10 per cent rate of return, over 15 years, the accumulated fund is likely to be 70 per cent higher compared to regular SIPs. 

7. Reviewing performance too frequently or rarely

Reviewing investments is important to assess whether the portfolio is moving in the right direction to achieve goals set out at the time of investment. 

However, according to Vivek, reviewing too frequently can lead to excessive churning while not reviewing can end up with a sub-optimal allocation which does not achieve the target as originally planned due to various reasons which may have required a scheme to be changed. 

8. Not paying enough attention to fund allocation for SIP

Selecting the appropriate type and number of funds across equity, debt, and gold is critical. While gold-based mutual funds are excellent for diversification, debt-based mutual funds offer more stable returns and can be utilized for short-term goals of 1-5 years.

According to Varun, ideally, a 1-2-3 framework comprising 1 gold mutual fund, 2 debt-based mutual funds, and 3 equity-based mutual funds can help create a structured mutual fund portfolio of 6 funds across the three parameters.

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