SIP mistakes to avoid

Delaying your start, neglecting research, or investing without clear goals can lead to missed opportunities and poor choices are some SIP mistakes to avoid.
SIP mistakes to avoid
3 min
11-October-2024
A systematic investment plan or SIP is an investment method that allows you to make small, fixed contributions to mutual funds at regular intervals and build wealth over time. While the rationale of SIP investments is clear to most investors, they often overlook the various SIP mistakes that can tank their investments. Starting late, investing without specific goals, trying to time the market, over-diversification, and failing to review your SIPs are just some of the common SIP mistakes investors make while investing.

In this article, we review the most common SIP mistakes to avoid to help you maximise the return potential of your SIP investments.

What are SIP mistakes while investing?

Beginning your SIP investment journey is relatively easy and simple, with multiple distributors like the Bajaj Finserv Mutual Fund Platform offering you a one-stop destination to do so. However, investing in SIPs requires thorough planning and careful execution. Common SIP mistakes like postponing investment, attempting to time the market, and investing without financial goals can often derail your investment journey and result in suboptimal returns. To help you avoid such mistakes, we have listed the most common ones below:

Starting too late on your SIP

One of the chief SIP mistakes to avoid is starting too late. Delaying SIP investments and waiting for the right time or favourable market conditions to start investing can severely compromise overall returns. Firstly, timing the market is often a poor strategy. Secondly, SIPs grow under the power of compounding. The compounding effect happens when the interest earned on your principal investment gets reinvested to earn returns. In simple words, both your principal and interest earn returns, amplifying the wealth-building potential of your investment. Therefore, the earlier you start an SIP, the more time your investments have to grow and earn returns. Investing in mutual funds through SIPs early can help you accumulate a large corpus over time.

Being too conservative on equity investing

The risk tolerance capacity of investors varies, and the mutual fund market offers enough options to curate portfolios that align with your risk capacity. Overlooking your risk tolerance capacity when selecting mutual fund schemes can cause unnecessary stress during periods of market volatility. That said, being too conservative on equity investments can also be a significant mistake.

Equity funds are riskier since they include stock investments that are subject to more volatility and fluctuations than other asset classes. However, equity funds also offer the best return potential. Ideally, your long-term SIP investments should include a healthy and diversified mix of equity funds to help maximise the return potential of your portfolio. While you can avoid cyclical sectoral and thematic funds, avoiding equities altogether is a poor choice. Curating a well-diversified portfolio with a healthy mix of equity, debt, and hybrid funds can help you strike the perfect balance between risk and returns.

Opting for dividend plans rather than growth plans

Choosing dividend plans over growth plans is a common SIP mistake to avoid while investing. While dividend plans may seem appealing due to regular payouts, they can hamper wealth accumulation in the long run. In a growth plan, your returns are reinvested into the fund, allowing your investment and returns to grow under the power of compounding. Therefore, opting for a dividend plan instead of a growth plan can limit the overall growth of your investment, making it a less effective tool for long-term wealth creation.

Not maintaining discipline

Failing to maintain investment discipline is one of the most common SIP mistakes made by investors. The success of an SIP investment depends on how consistently you can make contributions. Stopping your SIPs midway disrupts the impact of the power of compounding, reducing the earning potential of your investment. For instance, most investors tend to pause their SIPs during bearish markets, failing to realise that SIPs benefit from market downturns. SIPs work on the rupee-cost averaging principle that allows you to purchase more MF units when the market is low. Therefore, if you halt your SIPs when markets turn bearish, you miss out on the opportunity to buy more units and eventually benefit from market recovery.

Focusing on a AMC rather than the SIP

Investors often fall prey to this common SIP mistake while investing. In such cases, you focus more on the AMC or asset management company launching the mutual fund scheme rather than the merits of the fund. In other words, your investment choices and decisions are swayed by the name and pedigree of the mutual fund house rather than the actual performance of the fund. This often leads to staying invested in a poor-performing fund, simply because of the AMC’s general reputation rather than making an informed decision on the basis of the fund’s merits. You should remember that your commitment remains to the SIP and not the AMC. If the SIP is not performing well, switch to a different one that best aligns with your goals and return expectations.

Investing heavily of sectoral and thematic funds

Investing heavily in sectoral and thematic funds is a common SIP mistake while investing. Sectoral and thematic funds are cyclical in nature, meaning they offer high returns during certain market cycles. However, they also carry a higher degree of risk due to their concentrated exposure to a certain sector or theme. In other words, sectoral and thematic funds lack diversification, resulting in concentration risk for your portfolio. If the fund’s focus sector underperforms, you have to endure significant losses. Unless you have thorough market knowledge about certain sectors, it’s best to stick with diversified equity funds with a well-balanced exposure to different sectors and market caps.

Trying to time your SIP too aggressively

Attempting to time the market is one of the most common SIP mistakes. Many investors try to time market highs and lows and adjust their SIP contributions accordingly. However, this approach often backfires as it is nearly impossible to consistently time the market accurately. SIPs are designed as a passive strategy, where your investment benefits from compounding and rupee-cost averaging over the long run. The best way to maximise gains is to keep contributing consistently, regardless of market conditions.

Not monitoring SIPs properly

Failing to regularly monitor your SIPs is a cardinal SIP mistake. Once you start investing in mutual fund SIPs, you must regularly monitor your investments to track their progress. Monitoring your SIPs helps you understand whether they are still aligned with your investment goals or your portfolio needs adjustment. Periodic monitoring also helps identify consistently underperforming SIPs and adjust your portfolio accordingly.

Keeping a very short time frame

Many investors opt for very short-term SIP investments in the hopes of earning rewards quickly and cashing out. While you can start SIPs for short-term goals, mutual fund SIPs perform best in the long run. By investing for a very short duration, you can expose yourself to short-term volatility and possible losses. A long time frame of at least a decade gives the SIP enough time to balance out short-term market cycles through rupee-cost averaging and create wealth. If you are investing for short-to-medium-term goals, opt for 3-5 years. For long-term goals, your investment tenure should be 8-10 years. To estimate and compare returns over varied timeframes, you can use a mutual fund calculator.

Not tagging your SIP to specific goals

Failing to set clear financial goals for your SIPs is yet another common SIP mistake in investing. Your goal can be a short-term one, like saving up for the downpayment on a house, or a long-term one, like planning for retirement. The absence of clear financial goals can result in unfocused investments. Tagging SIPs to particular goals helps create investment focus and purpose.

In fact, starting SIPs without specific goals can make it hard to determine the target amount, the type of funds to select, and the investment period. Clear, specific, and time-bound goals help select the right SIPs in terms of tenure, risk, and potential returns. For instance, equity funds may be better suited for long-term goals like your child’s education, while debt funds may be better for short-term goals like planning a vacation.

Conclusion

SIPs can help investors accumulate wealth over time, provided they can avoid the SIP mistakes outlined above. Making these common SIP mistakes like starting late, avoiding equities, pausing contributions, and failing to monitor SIP performance can eat away at the investment’s return potential. Similarly, investing in concentrated sectoral funds, trying to time the market, cashing out with dividend plans, and investing for very short periods can result in suboptimal yields from your SIP investments. However, by being aware of the common SIP mistakes to avoid while investing, you can master the art of investment and maximise the return potential of your SIPs.

Every day you spend thinking about starting SIPs is a day spent missing out on the compounding benefits of SIPs. Therefore, if you haven’t started SIP investments yet, head to the Bajaj Finserv Mutual Fund Platform and get started today! This smart and user-friendly platform lets you peruse through 1000+ MF schemes and start SIPs with as little as Rs. 100. Moreover, its completely digital interface allows you to start investing and automate contributions with just a few easy clicks! So, if you were looking for a smart MF investing partner, the Bajaj Finserv Mutual Fund Platform is your ideal investment partner.

Frequently asked questions

What is SIP in mutual funds?
SIP or systematic investment plan is an investment method in mutual funds where you invest a fixed sum of money at regular intervals into an MF scheme of your choosing.

Why should I avoid timing the market when investing through SIP?
SIPs operate on the rupee-cost averaging principle, where the cost of investment gets averaged out over the long run. Therefore, timing the market is a futile strategy when it comes to SIPs. Instead, you should focus on consistent investing, regardless of the market conditions.

Is it a mistake to stop SIP during market downturns?
Yes. Most investors tend to halt SIPs during market downturns, anticipating losses. However, SIPs leverage rupee-cost averaging, where you buy more units when markets are low and less when markets are high. So, if you pause SIPs during market downturns, you won’t be able to exploit the opportunity to buy more and gain better returns when markets rebound.

Should I increase or decrease my SIP amount frequently?
It is advisable to keep your SIP amount consistent rather than increasing or decreasing contributions on the basis of your market fluctuation predictions. Doing so results in missed opportunities and lower returns.

Is investing in too many SIPs a mistake?
Investing in too many SIPs can be a mistake as there is the risk of over-diversification. Moreover, investing in too many SIPs may mean smaller contributions to each fund, diluting your potential gains.

Is choosing the wrong fund for SIP a common mistake?
Yes. Many investors, especially beginners, tend to choose the wrong fund for SIP investment. This happens if the investor fails to conduct due diligence into the past performance of the fund, its objectives, and the manager’s expertise.

Is it a mistake to not review my SIP portfolio regularly?
Yes. Failing to regularly review your SIP portfolio is a cardinal SIP mistake. You should review the performance of your SIPs regularly to identify ones that are consistently underperforming and adjust your portfolio accordingly.

Can I pause my SIP if I face financial difficulties?
Yes, you can pause SIPs when faced with financial difficulties and resume them once you are more financially stable.

Should I avoid SIPs in volatile markets?
No. You should avoid compromising your investment discipline in volatile markets. SIPs work on the principle of rupee-cost averaging, which means your average investment cost gets balanced out over the long run. While short-term volatility may impact your investment, returns remain more or less balanced in the long run.

Is ignoring the tax implications of SIPs a mistake?
Yes. As an investor, you should remain mindful of the SIP tax implications. For instance, equity SIPs are taxed differently than debt SIPs. Additionally, the taxation rates for each also vary depending on the holding period of the investment. Generally, short-term capital gains tax tends to be higher than long-term capital gains tax.

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