SIP dos and don'ts: When we think of investment, we think of options that help us secure our future financially. Smart investors start investing early and include diversified investment options in their portfolio.

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A lot of them are choosing mutual fund investments as they represent a large pool of stocks, and the performance of the fund doesn't depend on the rise or fall of a particular stock.

Among those who invest in mutual funds, a large pool of investors are opting for systematic investment plans (SIP).

In SIP, you invest a particular amount every financial cycle and purchase net asset values (NAVs) through them.

Since the price of NAV changes every day, investors purchase NAVs in different proportions for different financial cycles.

So, they make good money if they sell their NAVs when their price is high and purchase more NAVs in a cycle when their price is low.

Once the market recovers, they will have more NAVs than at normal times and get a higher return on their investment.

However, there are certain SIP strategies that can help you earn a good return on your investment.

At the same time, there are mistakes that can cause you to suffer losses in your SIP investment. We discuss a few of them here.    

SIP: Practices you can follow

Flexibility

The first advantage of SIP is that there is flexibility in investing through SIP regarding the investment period and amount.

That is, you can choose the investment period options of monthly, quarterly, or half-yearly as per your convenience.

Apart from this, whenever you want, you can stop your SIP and withdraw money. As your income increases, you can increase your investment in it.

Compounding

One of the major advantages of investing through SIP is that it gives the benefit of compounding, which means you get returns on overall investment and not just investment in a cycle or a year.

So, if you stretch your investment for the long term, your money may grow exponentially.

The longer you stay in your investment, the more you can earn through an SIP investment.

Rupee cost averaging

In SIP, you get the benefit of rupee cost averaging.

That is, if the market is in decline and you have invested money, you will be allotted more NAVs, and if the market is rising, the number of units allotted will be less.

In such a situation, your expenses remain average even in the event of market fluctuations.

That means you do not incur losses even if the market falls. In such a situation, when the market rises, you get a chance to get better returns on your average investment.

Disciplined investment

Through SIP, you learn to save for a fixed period of time; that is, whatever money you have to invest monthly, quarterly, or half-yearly, you spend the rest only after saving that amount.

This way, you get into the habit of disciplined investing.

SIP Invstment: 5 mistakes to avoid 

If you are committed to SIP investment, you should also know about the mistakes that people make unknowingly and may suffer losses from.

1- When you start SIP, don't pick a fund only because you have got some vague advice from a known person or because everyone is flocking to purchase it.

People invest money in a fund that gives good returns.

But it is not necessary that the same fund repeat its good performance in the future.

So, before picking a fund for SIP, do due diligence or get some expert opinion.

2- Sometimes, when a mutual fund doesn't perform well, investors stop their SIPs, withdraw their investment, or switch to a new fund.

While they are free to switch to a better-performing fund, stopping SIP midway is not the solution.

Rupee cost averaging helps one recover losses in the long term. So, one doesn't need to panic over a fall in their fund's performance.

3- Sometimes people make large investments through SIPs for the short term, and then they stop or their investment resources dry out.

SIP investment helps you more if you have a long-term investment horizon.

So, even if you don't have a large pool of money to invest, try investing a small amount every cycle through SIPs, but keep your investment horizon longer.

4- Do not panic if the market is going through a recession or has a temporary slump.

If you have resources to invest, don't stop your SIP.

Historic data shows that the market has bounced back heavily after the 2008 financial crisis and the coronavirus pandemic hangover.

Investors who invested when the market was low got heavy returns when it recovered.

So, think of the long-term strategy and don't bow down to market fluctuations.

5- An investment formula that applies all across the investment board is: don't rely heavily on one or two funds.

Diversify your portfolio.

Past performance is not a guarantee for future performance, so put your money in equity, ELSS, flexi cap, hybrid mutual funds, etc.

The more diversified your SIP portfolio is, the more secure you are during a market slump.