Investing in SIPs is a relatively easy process for investing money on mutual funds regularly in a disciplined manner. Setting up an SIP is just the initial phase of the process. Some minor blunders like halting investments amid falling markets or picking up a SIP without understanding the associated risks can have a profound effect on your performance in the future. Being aware of the things that you need to avoid helps you in following a suitable path.
Stopping SIPs When Markets Fall
One common mistake people tend to make is to discontinue their SIP once the markets take a downward turn. It may not feel great to watch the worth of one’s investments go down, especially for a new investor.
But market movement is a natural phenomenon associated with investing. Sometimes, when prices drop, an investor can get more units of the mutual fund with his/her SIP amount, while sometimes, he/she will have to settle for fewer units because of higher prices. This process is called rupee cost averaging, and it does not save investors from loss.
Rather than reacting to all market movements, reevaluate your financial plans, your investment horizon and risk tolerance. If you are satisfied with what you planned at the very beginning, do not change anything.
Choosing a Fund Without Research
The other common error in fund selection is choosing one based solely on the returns that it generated in the last period. Just because a fund gave returns in the previous period doesn’t necessarily mean that it will give the same returns in the future periods.
While selecting the mutual fund scheme for investment, consider the objectives of the fund, the risk associated with the fund, its expense ratio, and its performance in different time periods. Also compare these features with your investment needs and investment horizon.
It is necessary to know what kind of securities are held by the mutual fund scheme. There is high volatility in equity funds whereas there is the risk of interest rate change and default risk in case of debt schemes.
Investing Without a Clear Goal
Starting a SIP without knowing why you are investing can make it harder to choose the right fund or decide how long to stay invested.
For example, saving for a holiday in two years may require a different approach from building a retirement fund over 25 years. The time available and the amount of risk you can take should influence your investment choices.
Set a clear target before starting. Estimate how much you may need and when you will need it. A SIP calculator app can help you estimate the monthly investment required for a target amount. Remember that the result depends on the expected rate of return, which is not guaranteed.
Ignoring Inflation and Rising Expenses
An SIP amount that is considered adequate currently might be inadequate several years down the line because of inflation. Inflation leads to increased prices for goods and services, reducing the buying capacity of your savings.
If you are investing for the purpose of your child’s education or retirement, the cost needed in the future could be way higher than the present cost. Maintaining the same amount for a long period of time could leave a shortfall in your investment plans.
Check on your SIP amount once a year and in case your income goes up, think about stepping up your investment amount gradually.
Forgetting to Review Your SIP
While checking investments too often can be unhelpful, never reviewing them is another mistake. Your income, responsibilities and financial goals can change over time.
A fund that once suited your needs may no longer fit your plan. Its investment approach may change, or its performance may remain weak compared with relevant benchmarks over an extended period.
Use an MF app to track your mutual fund investments and review their progress in one place, where the available features allow it. Do not switch funds simply because of one poor month. Consider the reasons behind the performance, the fund’s risks and whether it continues to serve its purpose.
Conclusion
SIPs should be done only when there are well-defined objectives, proper funds to invest and steady contributions. Not investing at market falls, going for returns of recent past or overlooking inflation may have implications on the end results. On the other hand, having periodic reviews allows you to address issues without being influenced by every move in the markets. Do not exceed contribution beyond your budget, also bear in mind that the performance of mutual funds is market dependent. 5paisa offers investors some great tools to manage investments and review their plans.
